Pecking Over Finance

Date Added: Dec 2009
Format: HTML

One of the biggest decisions for any chief financial officer is finding the optimal capital structure for the firm. Is the company best served by issuing stocks? Or is it best to raise capital via bond debt, which is less sensitive to the markets? The "Pecking order" theory says that firms should use internal cash reserves first, then corporate debt. They should issue equity only as the last resort. According to the theory, firms that are relatively unknown to the market - or aren't fully understood - adhere to this pecking order when making capital structure decisions. This information gap is known as information asymmetry.