The pecking order states that firms should:
A)use internal financing first.
B)always issue debt so the market won't know when managers believe the stock is overvalued.
C)issue new equity first.
D)issue debt first.
E)always issue equity to avoid financial distress costs.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that firms should use internal financing first, followed by debt, and finally equity. This is because issuing equity can signal that a firm's stock is overvalued and lead to a decline in the stock price. Additionally, issuing debt can be less costly than issuing equity due to the tax deductibility of interest payments. Internal financing in the form of retained earnings is seen as the most cost-effective source of funds since there are no issuance costs or interest payments.

The Pecking Order States That Firms Should