3.7.2 Dependent variables (measurement of financial leverage) Financial leverage There are some issues regarding the definition of financial leverage of companies. In other words, there is no clear definition of leverage in the academic literatures. For the definition of leverage depends on the objective of the researcher with which the study is conducted. Previous studies suggest that the level of leverage depends on the definitions of leverage, several research studies have used leverage measures based on both market and book value (Rajan, R. and Zingales, L, 1995). Through capital structure theories that consider long-term debt as a substitute for financial leverage, we take the ratio of total debt to equity as a proxy of financial leverage because in Pakistan companies mainly have short-term financing as the average size of the firm is small, which makes it difficult to access the capital market in terms of cost of capital (Shah & Hijazi, 2004). The main sources of debt in Pakistan have been commercial banks, which do not convince long-term loans.3.7.3 Independent variablesSizeThe size (SZ) of the firm is measured by taking the natural logarithm of sales to smooth the variation over the periods considered. Regarding the pecking order theory, (Rajan, R. and Zingales, L, 1995) argued that this relationship could be negative. For the static order approach, the larger firms are, the more likely they are to issue debt, resulting in a positive relationship between debt and size. In another research (Shah & Hijazi, 2004) it was found that there is a positive relationship between and the size of the company. In this study we expect the same relationship between size and leverage. Profitability Given the pecking order theory that the firm...... half of the paper ......structure: the incentive signaling approach". Bell Journal of Economics, p 23-40.Shah & Hijazi (2004). Determinants of capital structure: evidence from Pakistani panel data. Titman, pp. S. and Wessels, R. (1988). The Determinants of Capital Structure Choices, Vol. 43. Welch, I. (2011). on November 14, 2010 from www.wikipedia.com: http://en.wikipedia.org/wiki/Capital_structure).