This study jointly investigated the inter-relationships among capital structure, free cash flow, diversification and firm performance. Prior research has separately examined each individual relationship, but all four of these components are closely related and have complicated endogenous relationships. Thus, a joint examination is needed in order to better understand the inter-relationships among them. The results of this study showed that unrelated diversification discount is not caused by free cash flow but instead by diversification performance itself. Free cash flow increases both related and unrelated diversification entropies, which contradicts the hypothesis that diversification discount is caused by an over-investment of free cash flows. This study also found that debt leverage is an efficient way to reduce free cash flows and enhance firm performance. In particular, for firms with unrelated diversification, debt leverage directly alleviates the negative effects of unrelated diversification on firm performance. It also indirectly counterbalances the level of unrelated diversification via free cash flows. Further discussion and industry implications are also presented in the paper