This is a theory that managers prefer to use additions to retained earnings to finance the firm, then debt, and as a final resort, new equity.
A) Rational decision maker hypothesis
B) Static trade-off hypothesis
C) Pecking order hypothesis
D) Market timing hypothesis

Question

Quizplus · Accepted Answer

The given theory is known as the pecking order hypothesis, which suggests that managers prefer to finance the firm's investments using internal funds (retained earnings) first, then debt financing, and finally resort to new equity issuance as a last resort. This is based on the idea that managers prefer to avoid the negative consequences associated with external financing, such as asymmetric information and agency costs.

This Is a Theory That Managers Prefer to Use Additions