Are trade-off and pecking order theories mutually exclusive in explaining capital structure decisions?

In this study, using various panel models and estimators, we find empirically that the trade-off and pecking order theories are not mutually exclusive in explaining quoted Portuguese companies capital structure decisions. However, the finance behaviour of quoted Portuguese companies comes close to that forecast by the pecking order theory: (i) the magnitude of the effects of financial deficit on debt is clearly greater than the magnitude of the adjustment of actual level of debt towards optimal level of debt; and (ii) information asymmetry seems to have special emphasis in companies’ capital structure decisions. On the contrary, the attempt for a trade-off between debt tax shields and bankruptcy costs seems to have little relevance in explaining the capital structure of quoted Portuguese companies. The results also suggest that the preference of quoted Portuguese companies is for internal funds rather than debt. However, when internal funds are insufficient, companies use debt to finance high growth opportunities and the need associated with dividends payment.