The pecking order theory says that instead of trying to achieve a specified target capital structure, firms use the cheapest form of capital available at any given time.

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The pecking order theory suggests that firms have a preference for internal financing, then debt, and finally equity as the last resort. This preference is driven by the belief that external financing sources such as debt and equity are more expensive than internal retained earnings. Thus, firms use the cheapest form of capital available at any given time, rather than aiming for a specific target capital structure.

The Pecking Order Theory Says That Instead of Trying to Achieve