In this work, the mechanism of void and microcrack formation along the adiabatic shear bands (ASB) was studied for processing dual phase steel by cold heading. Experimental investigation along with finite element simulation has confirmed that this mechanism depends on two types of instabilities, namely geometrical and thermal instabilities. The geometric instability occurs in the presence of second phase particles (inclusions) and in relation to the material flow orientation, whilst the thermal softening arises due to the localized plastic deformation inside the ASB. Progressive deformation was observed to cause the elongation of voids in the direction of shearing that formed microcracks in the ASB of the cold headed specimen. In addition, transformed bands were observed in the highly deformed zones as a result of the temperature in the ASB exceeding the Ac₃ transformation temperature 847°C. The superposition of the location of the ASB region containing the voids and micro-cracks with the phase transformation zone indicates that the development of optimized processing conditions is particularly critical for preventing fracture during cold heading of dual phase steels.