Abstract
The financing decision of a firm is influenced by both internal (firm specific) and external (macroeconomic) factors. However, most of the empirical investigations have focus on internal factors whereas the impact of macroeconomic variables on capital structure decisions is somewhat under researched particularly in the context of developing countries. The aim of the study is to analyse the impact of macroeconomic variables on the capital structure decisions of all listed textile firms in Pakistan for the period 2004-2013. Panel data regression (fixed effects model) was used to estimate the effect of macroeconomic variables on capital structure. The findings of the study reveal that public debt, exchange rates and interest rates are negatively related whereas corporate taxes, stock market development, inflation rate and GDP growth rate are positively related with economic leverage. Moreover, the relationship of corporate taxes, stock market development and exchange rates is significant with the economic leverage.