The decision about debt to equity ratio has been taken for the optimal capital structure. According to the agency cos theory, low level of equity or higher level of leverage tends to decrease cost of agency and can raise firm value. Most of the studies depicts that more level of debt than equity represents an optimal capital structure of an institution and therefore it leads to a good performance but Modigliani-Miller theorem proves the capital structure is irrelevant to the value of firm. Therefore, researchers motivate to examine the impact of capital structure on financial and non-financial firms. In this paper, the presence of agency cost theory in conventional and Islamic financial institutions of Pakistan is attempted to prove. We set the profit efficiency (ROE) of an institution as an indicator of decreasing agency cost and the capital ratio (CAP) of an institutions as an indicator of leverage. Moreover, we tried to compare the results of conventional and Islamic financial companies. Our findings are consistent with the agency hypothesis in case of both of conventional and Islamic financial companies. The greater leverage that equity financing is associated with higher profit efficiency. In this study, Generalized Method of Moments (GMM) has used to estimate the econometric model. Supervisor:- Dr. Abdul Rashid