This paper investigates whether the main capital structure theories-Pecking Order, Trade-off, Agency, and Signaling theories-could explain the determinants of debt for a panel data covering 162 Portuguese companies for the period 1999-2003. A better understanding of the determinants of debt in a relatively small, open, and industrialized economy of a less developed country may shed further light on Portuguese companies' capital structure decisions. The results have mixed evidences. A negative relationship between profitability and debt confirms the Pecking Order theory while a positive relationship between size and debt, confirms the Trade-off and Signaling theories. The opposite relationships between tangibility and short-term debt and long-term debt, suggest that the determinants of debt vary depending on the analyzed form of debt. On the whole, the results seem to support the capital structure theories in explaining the determinants of corporate debt. 

The pioneering work of Modigliani and Miller (1958) establish that the market value of the companies does not depend on its financial structure, if certain assumptions are met. Internal and external finance are perfect substitutes and all investors have equal access to the capital market, which operates in perfect conditions without issuing costs, bankruptcy costs, taxes, or costs of asymmetric information (Modigliani and Miller, 1958). Modigliani and Miller (1963), admitting the incidence of taxes on companies' income, indicate that companies prefer external capital to internal capital due to the tax savings allowed by the deduction of financial charges on the debt.

The literature on capital structure has been expanded by several studies that have focused on personal taxes (Miller, 1977), bankruptcy costs (Titman, 1984), agency costs (Jensen and Meckling, 1976; Myers, 1977), and transaction and asymmetric information costs (Ross, 1977; Myers and Majluf, 1984). Several studies (Titman and Wessels, 1988; Opler and Titman, 1994; Fama and French, 2002; Chen, 2004; Deesomsak et al., 2004) have focused upon companies' capital structure decisions. Studies formulating and testing the determinants of capital structure have been plentiful in the last decade. Rajan and Zingales (1995) state that the determinants of capital structure (such as size, growth, profitability, and asset structure) are important for the G7 countries. Booth et al. (2001) identify similar determinants of capital structure for ten developing countries.

Applied Finance Journal, Capital Structure Theories, Capital Structure Decisions, Modigliani and Miller, Statistical Techniques, Pecking Order Theory, Portuguese Capital Market, Stock Exchange Commission, Corporate Finance, Multinational Financial Management, Financial Management.