The work on capital structure was started by Modigliani and Miller in 1958.

They

showed that the value of a firm is determined by its power earning, risk associated with assets that a firm holds and independent way of financing its investments.

1.2 Problem statement and purpose of study The research problem involves the need to determine which factors are more influential in determining the level of leverage of listed companies in the energy sector of Pakistan. We intend to find out whether a firms tangibility of assets, size, growth and profitability significantly affect its leverage and what is the direction of this influence (i.e. positive or negative association), and to find out which of the capital structure theories better explains the capital structure of these firms.

1.3 Significance of the Study The emerging economy of Pakistan needs special attention to be given to all sectors in all perspectives. Hence this study attempts to provide information that may help in taking capital structure decisions in listed companies of oil and gas sector of Pakistan, which will ultimately support in maximization of the value of firms on the one side and the minimization of cost of capital on the other side. This will make the oil and gas sector of Pakistan an attractive investment that will ensure the growth of the sector in itself and the resultant growth of economy.

INTRODUCTION Capital structure refers to the combination of debt and equity but giving priority over each other in a financial decision of a firm to invest in pursuit of maximizing value of the firm and its shareholders wealth. The financial decision of capital structure is not only concerned with finding the right kind of finance, but is also concerned with choosing the best overall mixture of these funding options for commencement and

running the operations of business. Therefore, the financial decision is considered as to have occupying important role in financial management to formulate the capital structure of the firms, which affects its overall operations, growth and value.

Capital structure refers to the mix of debt and equity used by a firm in financing its assets. The capital structure decision is one of the most important decisions made by financial management. The capital structure decision is at the center of many other decisions in the area of corporate finance. These include dividend policy, project financing, issue of long term securities, financing of mergers, buyouts and so on. One of the many objectives of a corporate financial manager is to ensure the lower cost of capital and thus maximize the wealth of shareholders. Capital structure is one of the effective tools of management to manage the cost of capital. An optimal capital structure is reached at a point where the cost of the capital is minimum.