The pecking order states how financing should be raised. In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signals on security overvaluation the firm's first rule is to:
A) finance with internally generated funds as there is no market interaction.
B) always issue debt then the market won't know when management thinks the security is overvalued.
C) reduce asymmetry before any financing activity.
D) increase the financial slack to reduce the reliance on internally generated funds.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prioritize their sources of financing (from internal financing to equity) according to the principle of least effort, or least resistance, preferring to raise equity as a financing means of last resort. Hence, financing with internally generated funds is preferred to avoid the costs and issues related to asymmetric information in the market.

The Pecking Order States How Financing Should Be Raised