Introduction A clear understanding of the determinants of capital structure of any given firm is still not clear, it is still mind

boggling that how different factors affect capital structure of a firm. This study will be focusing on different determinants of capital structure and will try to find out evidence in the different companies listed in Pakistan. Before we go into the detailed background of the subject we need to understand what is capital structure? Basically capital structure refers to approach that how a firm finances its business or total assets, in which ratio a company uses different sources of finance. Background According to the trade-off theory while selecting an optimal capital structure a firm trades off certain advantages of financing through debt against its cost. When firms decide their capital structure they try to achieve a specific ratio which is consistent with different theories which tell us about the trade-off between advantages and disadvantages of debt (Carpentier, 2006). When the amount of financing through short term debt is high it affects the overall leverage of the firm and it is negatively related to the firms operating assets. When the debt is categorized in long term and short term, it is noticed that capital structure based on long term debts financing is positively related to operating assets unlike short term debt financing. Previous findings also show that short term financing is negatively related to the profitability of firms and positively related to the size of company, it is true particularly for the banking sector (Amidu, Determinants of capital structure of banks in Ghana: an empirical approach, 2007). Growth is one the factors that causes variations in firms value and this is why firms having greater growth opportunities are considered to be at greater risk, so such firms employ comparatively less debt in their capital structure. The interest which is charged to debtor usually depends on the fact that how much risk is involved in lending money to a certain firm and it totally depends on lenders assessment (Eriotis, How firm characteristics affect capital structure: an empirical study, 2007).

Problem Statement
Taking decision about the capital structure of the business have always been a difficult task, because capital structure directly affects the performance and profitability of the business, there are several determinants of capital structure and each one of them have direct affect on financial leverage which needs to be vindicated.

Research Questions
What are the factors involved in determining firms capital structure? How firms choose their capital structure? What are the different variables that affect capital structure? Do theories of capital structure stand true in context of Pakistani companies?

Research Objectives

To figure out different factors which affect capital structure decision To identify the affect of different factors on capital structure To learn how different factors affect the performance of the firm To find the evidence of capital structure theories in companies listed in Pakistan

Significance of Study
Though these topic determinants of capital structure have been studied over the time again and again, but if we look into this topic with reference to the Pakistani companies still there is a lot of work needed to be done. This study will be a step ahead to look into the evidence from Pakistani companies and will try to vindicate theories of capital structure.

Delimitations of the Study

There are many determinants and factors that affect the capital structure of the company, so we have ignored many variables like inflation, growth and size of the firm. Literature Review

Capital structure are play vital role to maximize the company value. How company maximizes the firms return and increases its values. What is the effect and how they found to increase wealth. The company struggle the cost and benefit of the leverage. The firm manager they decide leverage to use in the capital structure or they avail market opportunity either to decide issue debt or equity. That can change to utilize the debt either go to equity. Manager adjusts debt to equity ratio. And they maintain our target and also maintain leverage period of time. Find exact capital structure to maximize firms values and boost up wealth. Many of the studies have been conducted and to collect the empirical evidence. (ooi, 2007) Basically capital structure is to explain the firm way which they can be financing partly with debt and equity. If the firms use the debt they protect the tax. According to the principle of accounting debt is not paid tax deducting the interest before tax. That company benefit for using the debt. When making decision about how much debt and equity to use for financing its business. Firms are optimizing its value where marginal cost of debt. Firm determined by balancing the cost and target leverage first we identified by single period between cost and benefit of debt. Secondly we identified the target debt and may be adjusting over time with change in mitigate the risk and magnitude of cost and its benefits of debt. (zhang, 2004) US firms moving to word target leverage and also leverage target required to take 3.7 years average period to achieve the debt time and their targeted capital structure and to adjust debt ratio maintain and adjusting their leverage. First target may be static which might be identified period cost and debt benefits. And second dynamic trade off policy. Many of the firm moving to debt Where economic condition are good as compared to country where economic condition are stable or may be bad report show that 80% percent of chief financial officer agree to having target leverage. Experiencing higher market to book value ratio tend to have low target debt ratio. (Amidu, Determinants of capital, 2009)

Leverage play vital role in diminishing the agency cost in operating diversifying and mitigating business risk. When a firm issuing debt it means allowing outside investor to finance firms operation for interest. It borne by shareholder to creditor and it decrease the agency cost on the other interest payment on debt leverage and less stake holder in business. And also less amount interest paid. If the debt is increasing the tax amount is reduced. Companies not 100 percent finance their capital with debt. Company increase the leverage ratio increases the profitability of financial distress. Distress means a firm cant pay off its debt obligation. For example decline in sale. It also decrease market share it also decline in share price and loss of human resources etc. financial distress firms changes the investment policy. Firm may looking short-range cut back in research and development expenses? That would be happened which ultimately decrease the firm value. Distress also creates loses in the mind and trust. (peter, 2002) Agency costs are also important role to play in capital structure. Firms uses on techniques to align management goal is maximizing the wealth of share holder. Two main sources of agency costs first is Separation of stakeholder and second are management creates agency problem. It means conflict of interest firm manage to use the organization resource for maximizing the wealth of shares holder. Another source of finance is retained earning refers net income that company reinvest into business is called retained earnings. It is very easy source of financing to acquire it. If your issuing debt or equity and they control their price from fluctuation. (Marcia Cristi, 2005) Debt is also important source of money to increasing the firms wealth. Borrowing of firm is denoted by debt. Debt offer tax shield benefit to deductible in the tax. If firm issuing more debt it considered as good news and price of share increase in the market. But debt makes a firm bound to pay interest which at maturity of the time to be paid. It is not easy to acquire. This article showed that the importance relationship between capital structure cost of capital and among capital budgeting decisions and firm value. And it also effect bankruptcy cost on capital structure and firm value. Debt usage positively relates to risk and firm size. Study investigate that variables are one which effect and measured them. Like capital structure and debt effect the decisions of the companies. (Serkan Yilmaz Kandir, 2008) Although capital structure theory is very important relationship of debt and equity. To know about what are effect and there causes to its usage of capital structure. There are fewer studies on the capital structure of firms in the tourism industry other textile miles cement factory and cotton miles. Kwansa and Cho (1995) investigated the impact of the trade-off between financial distress costs and tax earnings in the US restaurant industry. They show a significant bankruptcy costs and Effect on capital structure and firm value and manger of the firms focus shareholders wealth. They found that and effort of lodging companies appear to use internal funds like retained earnings bonus share and deposit of cash in to account and next source of finance is debt respectively, in their investment stage, while retained earnings are the major source of funds in the operating stage. Firms are only focus only to the maximizing our wealth. Housing structure collectively companies are capital intensive, as they require may some more capital at both investment to start a new business and running business operating stages. Since assets of lodging companies mostly consist of fixed assets are very important for the any of the firms and share of long-term and as well short term financing debt and owners

equity becomes rather high. Furthermore required, because of the structure of the industry, lodging companies to accommodations of living in business and further expand are highly sensitive to systematic risks. Therefore, accommodations of living companies face high operating and financial risks (Andrew and Schmidgall, 1993). All these funds like equity or may be debt to perform and lodging it important to determine the way in which someone or something is composed of capital structure and the influence affecting leverage decisions and debt ratio. The purpose of this study is to find the variables that affect capital structure and debt decisions of the ISE accommodation of living companies mean lodging. Validity of the pecking order and trade-off theories for suffer of the companies is also applied. We estimate a dynamic of not changeable variable effects panel data model using the Arellano-Bond system generalized method of moments (GMM) method for some the companies traded in the ISE. For each company, the data set includes for estimate annual reports time series observations for the period from 2003 to 2006.Our findings suggest that effective tax rates those country which economy is stable and there profitability of sales and sales revenue, but tangibility of assets, and return on assets seem to be negatively related to the capital structure of lodging companies. On the other hand the company, free cash flow, non-debt tax shields, growthopportunities, net commercial debt, and firm size do not appear to be related to the debt ratios of lodging structure of a firm and values. (morri, 2009) So far, OUR ALL THE RESEARCH literature has not been providing the brief guide lines to clearly explain the reasons and causes of leverage choices. Academic literature have in-depth investigated the issue, but many concerns still same and unchanged. Modigliani and miller (1958) made the stated attempted to solve the problem and even though they had providing good intuitions, their theory has shown to be weak and based on unnecessary assumptions. However their work is considered as the starting point of the optimization to more portfolios and increasing the company shares and goes up good will mentioned in this theory. Today there is also the behavioral and observation theory stating that different level of leverage are adjusted by the attempted to solve contingent situations and performed that affect the day-today activity of firms. Developed by Myers (1984) and Myers and male (1984), the pecking order model of capital leverage and usage of debt and equity argues that managers have not subject to usual rules information of the firm value that investors do not have. For this situation they arranged the capital structure of the firm they manage by taking into account this information not losing their value minimizing shareholders profits its cost for current shareholders. Managers always decide issuing debt to avoid the equity using valuation discount associated with equity issues. The theory does not show and predict the information the existence of a perfect debt equity ratio because the current leverage of a firm turn its total requirements of external financing. (Serrasqueiro, 2006)

Bibliography
Amidu, M. (2009). Determinants of capital. structure of banks in Ghana , 1-33. Amidu, M. (2007). Determinants of capital structure of banks in Ghana: an empirical approach. Baltic Journal of Management , 2 (1), 10-11. Carpentier, C. (2006). The valuation effects of long-term. International Journal of Managerial , 2 (1), 10. Daskalakis, M. P. (2009). Are the determinants of capital structure country or firm specific. springer , 33 (3), 325. Eriotis, N. (2007). How firm characteristics affect capital structure: an empirical study. Managerial Finance , 33 (5), 2-3. Eriotis, N. (2007). How firm characteristics affect capital structure: an emprical study. Managerial Finance , 5. Marcia Cristi, Z. M. (2005). Capital structure. Determinants of debt adjustment , 1-22. morri, G. (2009). What determines the capital structure. What determines the capital structure of real estate companies , 1-55. ooi, J. (2007). The determinants of capital. Evidence on UK property companies , 1-17. Ooi, J. (1999). The determinants of capital structure. Journal of Property Investment & finance , 6. peter, B. A.-N. (2002). The relationship between capital structure and ownership. capital sturcture and ownership , 1-13. Serkan Yilmaz Kandir, E. K. (2008). Determinants of capital structure:. investigate the factors affecting capital structure decisions , 1-16. Serrasqueiro, Z. (2006). Are capital structure decisions. capital structure decisions and creditors, comparing the results of service SME , 1-24. zhang, q. (2004). Institute of Industrial Economics, Chinese Academy of Social Sciences,. capital and financial performance of private , 1-11.

Conceptual model Profitability

Portability is one of the determinants of the capital structure; the profitable firms prefer to rely on internal financing in order to avoid the extra costs associated with external financing or debt. As we know that profitability is measured through difference between revenue and expenses, where as financing through internal or external sources have a certain cost. The main aim of the decision makers is to minimize the costs of financing no matter its internal or external (Daskalakis, 2009). It is important to know that apart from debts cost there are many others costs which affect the companys profitability, for example taxation.

Size
The size of the firm is usually affected by the financial and legal system of the state and size directly affects the capital structure. Firms which are larger in size incur lower cost of transactions related to debt, so financing becomes comparatively less costly. As cost of external financing is reasonable for larger firms thats why they prefer external financing, where as smaller companies prefer internal financing because incase of external financing their per unit cost increases (Ooi, 1999). Size also affects other factors like bankcruptcy and costs of the risk. As its matter of the fact that large firms are more diversified so they bear low risk as compared to the small firms. Another factor related to the size is that banks and other finance sources are more willing to lend money to the larger companies, because it reduces the credit risk for banks. The larger companies also enjoy the higher bargaining power so they can bargain a lower interest rate (Eriotis, How firm characteristics affect capital structure: an emprical study, 2007).

Liquidity

Theoratical Framework

Profitibility

Financial leverage

Size

Liquidity

Hypothesis H1 profitibility have posative relationship with financial leverage H0 profitibility does not have posative relationship with financial leverage H2 Size have posative relationship with financial leverage H0 Size does not have posative relationship with financial leverage H3 Liquidity have posative relationship with financial leverage H0 Liquidity does not have posative relationship with financial leverage

Give methodology of research

What is the population?
Targeted population are basically different companies which are listed in karachi stock exchange, we have collected data from financial statements of these companies.

Sample
The data is taken from financial statements of 20 different companies and the sample size 100. The financial statements of past 5 years of every company.

Type of data
Secondy data will be used for analysis, as it would be taken from financial statements of last 5 years.

How the data will be collected?

The required data will be extracted from financial statements of last 5 years of 20 different companies.

sources of data
the main source of the required data are financial statements, which are downloaded from the official websites of different companies and secp.

Describe your instrument

Time Schedule
With the help of our developed questionnaire required data was collected from different manager and entrepreneurs during January to June 2013 and research would complete in June 2013.