The pecking order explanation of capital structure states that a hierarchy of financing exists for firms, in which retained earnings are employed first, followed by debt financing and finally by external equity financing.

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The pecking order theory of capital structure suggests that companies prioritize using their own retained earnings for funding, followed by debt financing and finally resorting to external equity financing as a last resort. This theory is based on the idea that firms prefer to maintain control and avoid the transaction costs associated with external financing.

The Pecking Order Explanation of Capital Structure States That a Hierarchy