Determinants of Indebtedness in Expanding Portuguese Hotels

The hotel industry has been one of the fastest-growing economic sectors in Portugal in recent years. According to the European Best Destinations website, Portugal has consolidated itself as a destination of excellence. The explanation of the capital structure of firms remains relevant in financial research. However, prior international empirical evidence is not exclusive and is still scarce in the Portuguese hotel sector, which motivated this research. This study aimed to analyse the influence of determinants on the capital structure of 821 Portuguese hotels between 2011 and 2019 (until the constraints of the COVID-19 pandemic affected the international tourism sector) and to determine whether strategies were conducted according to trade-off and pecking order theories. This study used an econometric approach based on the static panel data model, with tests recommending the fixed effects model estimated by the least squares dummy variables (LSDV) within. The analysed determinants were return on assets, size, tangibility, growth opportunities, risk and other tax benefits besides debt in order to explain the indebtedness through three alternative measures. The results of this research show that managers sought an optimal combination of equity and debt, which was weighted between tax savings and the cost of financial distress. However, they pursued this objective through the hierarchical sequencing of funding sources in order to minimise the costs of information asymmetry.