ISSN: 2306-9007 Kiran (2013) 37 Determinants of Capital Structure: A Comparative Analysis of Textile, Chemical & Fuel and Energy Sectors of Pakistan (2001-2006) SAMRA KIRAN Lecturer City University of Science and Information Technology Email: kirran_77@yahoo.com Abstract Using panel data for the period 2001-2006 for the Textile, Fuel and Energy and Chemical sectors from KSE a Fixed Effect model was applied in the study. It has selected six independent variables, which include Size, Profitability, and Growth, Non debt tax shield, Tangibility and earning volatility in order to measure their effect on the leverage ratio. In all the three sectors tangibility variable is highly significant, which favors the Trade-off theory. Size variable does not favor the Trade-off theory. Profitability fails to confirm the pecking order theory and Trade-off theory. Growth variable does not conform to the Agency cost theory in all the three sectors. Earning volatility does not support Bankcurpsy theory and Agency cost theory. Key Words: Debt, Equity, Textile, Chemical, Fuel & Energy and KSE. Introduction The capital structure is basically the combination of two different types of financing sources, i.e. debt and equity. Various firms formulate their capital structure differently not only to finance their assets but also their business operations. According to Ilyas (2008) Capital structures consist of long term permanent sources of financing, including long term loans preferred stocks, common stock, and retain earnings. Shah and Hijazi (2004) suggests that capital structure consists of different options a company utilizes in order to finance its assets. Though the capital structure of a firm may change from time to time, but at any given time period the firm has a specific debt equity ratio in mind. The individual decisions should be consistent with this target ratio. If it is below this target level than new funds will have to be raised by issuing debt, whereas, if the actual proportion is above the target ratio than stock will be issued to bring the firm in line with the target debt ratio. The firms have to analyze a number of factors before it can determine their optimal capital structure which is then used to raise funds in the future. Decisions about the capital structure involve a trade off between risk and return. When more debt is utilized fixed obligation of the firm increases which will then increase the risk in the earning stream of a firm, but at the same time it may increase the expected future returns. Moreover, using higher debt shows the confidence of the firm about their future earnings making the stock more attractive for the investors. Thus we can say that an optimal capital structure balance risk and return. To increase its value, the firm can finance its assets issuing bonds, long term loans, and short term loans from banks, other financial institutions and leasing finance to combine with equity. According to Horne and James (2002) the risk and profitability of the investment determine the firm value. There are various theories in corporate finance, which discuss the effect of capital structure decisions on the valuation of the firm. I    nternational eview of anagement and usiness esearch ol. 2 ssue.1    