Examining capital structure determinants of seventy two publicly-listed Malaysian real estate firms during 2007-2009, this study clarifies the impact of the sub-mortgage loan crisis on the capital structure of the sampled firms, and establishes which theory, Trade-off Theory (TOT), or Pecking Order Theory (POT), that explains financing behavior by the firms. The capital structure determinants tested are size, profitability, tangibility, non-debt tax shields (NDTS), growth, liquidity, business risk (BR) and effective tax rate (ETR). Three debt ratios, namely, short-term debt ratio (STDR), long-term debt ratio (LTDR) and total debt ratio (TDR), are proxies for capital structure. Findings indicate that size and profitability affect debt ratios positively, NDTS and liquidity affect the
debt ratios negatively, tangibility affects STDR and TDR positively and LTDR negatively, growth affects STDR and TDR negatively and LTDR positively, while ETR affects LTDR and TDR positively and STDR negatively. Inconsistent with almost all previous studies, and unsupported by both the TOT and POT, business risk positively affects STDR and LTDR, and has a significant positive relationship with TDR. The results also show that the debt levels of these firms
declined during the sub-mortgage loans crisis. Finally, the results suggest that both theories (TOT and POT) explain the financing behavior of the sampled firms, though, when taking into account the decline in the debt levels, POT seems to explain the financing behavior of the firms better than TOT
