Several competing theories have emerged, since Modigliani and Miller's famous propositions on the capital structure, to test the ground realities of capital market imperfections such as taxes, bankruptcy costs, agency costs, and information asymmetries. In practice, capital structure matters, because empirical evidence shows consistent pattern of leverage ratios, both across industries and for individual firms over time. Leverage ratios of specific industries have been documented by many researchers. Therefore, the determinants of the capital structure of companies have been debated for long in corporate finance. This debate has resulted in differing theories on capital structure. However, the debate on the determinants of the capital structure is an ongoing one. In the light of this debate, this paper attempts to test the important determinants of the capital structure of companies. Taking profitability, collateral value of assets, growth, debt service capacity, size, tax rate, non-debt tax shield, liquidity, uniqueness, and business risk as the determinants and the Debt-Equity Ratio (DER) as the dependent variable, multiple regression model is used for the pooled data of pharmaceutical companies in India. The period of study is from 1993 to 2002. The results indicate that the regression is a good fit and the independent variables together determine the capital structure of companies. Further, the results show that profitability, collateral value of assets, growth, size, tax rate and uniqueness do not have significant coefficients and therefore, are not the significant determinants of the capital structure of companies. The coefficients of the variables, debt service capacity, non-debt tax shield, liquidity and business risk are significant and, therefore, these variables are the important determinants of the capital structure of pharamaceutical companies in India.

A growing firm needs capital. This capital can come from debt or equity. When companies can finance themselves with either debt or equity, certain questions arise. Is one better than the other? If so, should firms be financed with all debt or all equity? If the best solution is some mix of debt and equity, what is the optimal mix? It is generally understood that the optimal capital structure of a firm is the composition of debt and equity which results in the minimum cost of capital. But the determination of an optimal capital structure is not an exact science.

Firms have to first analyze a number of factors such as the firm's business risk, its need for financial flexibility, shareholder wealth maximization, survival against competition, assurance of a steady source of funds, acquisition and maintenance of a good rating in the market, profitability, and growth rate before deciding upon an appropriate capital structure. All these factors are a pointer to one important fact, that, companies will have to search for the right capital structure which enhances firm value while minimizing costs. The capital required for investment, while often scarce, can be generated from a variety of sources. How firms choose among these various sources and why, have been the source of much debate in financial literature.

Differing views have been expressed over the years on the various factors influencing capital structure decisions. Especially, the question of whether corporate capital structure influences the cost of capital and consequently the value of the firm has engaged the attention of financial theorists for long. The extreme arguments on capital structure have been quantified into two main theories by David Durand (1952).

Applied Finance Journal, Factors Determining, Capital Structure, Pharmaceutical Companies in India, Corporate Finance, Indian Companies, Indian Crporate Firms, Financial Markets, Financial Leverages, Earnings Before Interest and Taxes , EBIT, Corporate Tax, Tangible Assets , Center for Monitoring Indian Economy, Bombay Stock Exchange, BSE, National Stock Exchange, NSE, Multiple Regression Models, Management Accountant.