Background A very important decision for every firm is what capital structure to chose. The pecking order theory has some suggestion on this topic of appropriate capital structure. It one of the leading theories of financing, which explains several functional contents that manager should know in order to make best decisions Main idea of pecking order theory of financing Pecking order theory of capital structure states that firm has a preferred hierarchy for financing decisions. The highest preference is to use internal financing ?óÔé¼ÔÇ£ retained earnings and the effects of depreciation. Before going for external funds should be used...
reason why financial managers may issue equity. Summary Pecking order theory allows understand how important financing decisions are made. It says that it is more preferable to use first internal finance and then if investments demands external. From external finance debt is better then equity because of issuance costs are less and because investor see issuance of stock as bad signal and respond with stock price decrease by thinking that their stocks are overvalued. Also good action for firm is to create financial slack in order to invest to more projects and have possibility to undertake future investment opportunities