The capital structure of a firm consists of debt and equity and the firms try to maintain appropriate financing mix to attain target capital structure. Modern capital structure theory stems from the influential article on finance by Nobel Laureates, Professor Franco Modigliani and Merton H. Miller in the year 1958. Many theories developed over the years since 1958, which explain the determinants of capital structure decisions. The Trade-Off Theory and Signaling Theory in particular, play a crucial role in identifying and testing the various properties of leverage decisions. This paper briefly tries to find out whether some a priori assumed macroeconomic determinants can be related to the leverage. For this purpose, an empirical study was undertaken on Indian Information Technology Sector, covering 22 selected firms traded in BSE. Following the developments in the contemporaneous estimation techniques that allow us to use Time Series and Cross Section Data concurrently, the Panel Data Methodology has been applied to the actual data to compute the leverage ratios for each firm within the time period 2003–04 to200708 to determine the extent to which the macroeconomic determinants influenced the leverage ratios under various groupings such as Size, Growth Opportunities, Profitability, Liquidity and Dividend Payout. The results from econometrical analysis reveal that only the growth of firms has a positive and statistically significant impact on the IT firms’ leverage ratio. The paper finally highlights creditor rights, maintenance of legal reserves and law enforcement, directors’ rights on borrowing, risk assessment as essential determinants of capital structure decision of a firm.
