(1) IntroductionThere are three main theories of capital structure which materialized from the thoughts on the theorem of Modigliani and Miller ( MM) (1958), the first static trade-off theory, agency cost theory and pecking order theory. This study is undertaken from the perspective of Pakistan. The phenomena developed by MM on the perfection of the market under the criticisms of the theories mentioned. The pecking order model is a component of capital structure was developed by Myers CS et al 1984. It states that companies prioritize their source. financing in descending order (from retained profits to new stocks) internal funds are used first by retained profits, depreciation, and when exhausted, debt is issued, and when not wise to issue more debt, equity is issued as a last resort. Due to the asymmetry of the "information effect", the organization changes its behavior in favor of capital structuring, positive investment opportunities must be financed by available financial resources or by debt financing, a more valuable combination of capital structuring (Myers CS et al 1984). Support rigid dividend policies to internally generate funds capable of financing investment opportunities. This theory holds that companies stick to a hierarchy of financing sources and prefer internal financing when it is available, and that debt is preferred over equity if external financing is necessary. According to the pecking order, the company has not well defined the optimal debt ratio due to information asymmetry. The company adopts a hierarchical order of financing preference. Internal financing is the first priority. If companies need external safe debt financing, venture equity financing is only used as a lost recourse. Myers CS et al. 1984. Every small and large business invests to maximize...... middle of paper...... ISSN 1450-2887.Modigliani. F. and Miller. M.1958, “The cost of capital. Corporate Finance and Investment Theory,” The American Economic Review. Flight. 48. Raj Aggarwal and N. Aung Kyaw. January 2006, “Leverage, Investment Opportunities, and Firm Value: A Global Perspective on the Influence of Financial Development.” Shyam-Sander. L. and Myers. SC1999, “Testing Static Tradeoffs Versus Hierarchical Models of Capital Structure,” Journal of Financial Economics. Flight. 51. 219 – 244. 1999. Stewart C. Myers. 1984, “The puzzle of capital structure”, The Journal of Finance, Vol. 39, no. 3.Wolfgang Bessler,W. Drobetzy and Matthias C. Gruninger. 2008, “International Tests of Pecking Order Theory.” Xueping Wu. Zheng Wang.2004, “Equity financing in a Myers-Majluf framework with private benefits of control”, Journal of Corporate Finance 11 (2005) 915– 945. 22