Trade Off and Pecking Order Capital Structure Theories in Tourism Sector in the Portuguese Central Region

Abstract

The present study aims to identify the predominant theory in financing decisions, and which are the determinants of the capital structure of small and medium enterprises (SMEs) of the tourism sector in the Central Region of Portugal. The statistical method applied was the econometric model of linear regression, using a sample of 606 SMEs in the tourism sector in the Central Region, for a period of analysis between 2011 and 2018. The focus on the tourism sector is due to its importance in the Portuguese economy and to the existence of few studies, particularly in the Central Region. In the analysis of the determinants of capital structure decisions we used as explanatory variables profitability, asset tangibility, size, total liquidity, other non-debt tax shields, risk and age of SMEs. The results obtained suggest that the capital structure decisions follow more closely the assumptions of the Pecking Order theory but may also follow the assumptions of the Trade-Off theory. Therefore, this paper enhances that Trade-Off and Pecking Order Theories are not mutually exclusive in explaining the capital structure decisions of SMEs. We may conclude that SMEs firstly finance themselves with retained earnings, then use external financing and finally resort to capital increases. Keywords: determinants of capital structure, SMEs, tourism sector, pecking order theory, trade-off theory