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The literature provides evidence that the capital structure of a firm is often a combination of several securities; it can arrange (1) Bank loan (2) issue debentures/bonds, (3) issue shares (4) lease financing, or (5) utilise its retained earnings. Eventually number of ideas and theories has been developed to discuss the optimal capital structure. Optimum is the trade-off between the benefit of tax and costs of financial distress; a firm faces due to the borrowed money. Although extensive research work has been done on the capital structure but still it remains one of the unsettled topics in finance. Optimal capital structure has an impact on corporate profits. Debt is considered as the cheapest source of financing due to tax shield, higher the firm's tax bracket more the debt is advantageous to a firm. The trade off theory states that higher debt is associated with higher profitability. Three reasons support this theory; one debt allow tax shield. Second, more trust is built on profitable companies considering more sustainable and less prone to bankruptcy; hence high profitable companies are able to seek more debt. Third, agency cost, for the profitable firms, lenders/creditors give relaxation in monitoring charges, which reduces the debt cost. This motivates profitable firms to go for more debt. If firms follow pecking order theory then it base financial decision on the availability of internally generated funds. Profitable firms prefer internal financing. External finance is only used when internally generated funds are not sufficient. Number of studies worldwide shows different results. Textile industry is the largest sector of Pakistan, which has major share in exports. Hence this sector has a major impact on the national economy. This sector major financing depend on bank loan. In mid 1990s Government of Pakistan started financial sector reforms and in 1997 it was strengthened when the government issued three amended ordinances that are, State Bank of Pakistan Act, 1956, Banking Companies Ordinance, 1962, and Banks Nationalisation Act, 1974. These amended ordinances further strengthened the State Bank of Pakistan in regulating banking sector. Furthermore, Securities and Exchange Commission of Pakistan (SECP) was established under the Act of Parliament in 1997 as an autonomous body. It started operations from January 1999 as regulator of Non-banking financial institutions. This study examines the debt and its determinants in the light of capital structure theories in the pre and post financial sector reforms.

Corporate Debt Policy—Pre- and Post-financial Market Reforms: The Case of the Textile Industry of Pakistan