Pecking order theory

Which is the optimal order of raising funds according to the pecking order theory?

• 1. Debt

  2. Equity

  3. Internal funding

• 1. Equity

  2. Debt

  3. Internal Funding

• 1. Internal funding

  2. Equity

  3. Debt

• 1. Internal funding

  2. Debt

  3. Equity

Which agency problem is the pecking order theory based on?

• Personal intentions from the management

• Information asymmetry

• Financial matters regarding the compensation of the board

What does the information asymmetry relate to in terms of raising funds through debt and equity?

• Risks are priced in and expressed in interest rate and demand (price)

• Information asymmetry makes it easier and cheaper for the company to raise funds

• Debt and equity don't relate to information asymetry

What happens usually to the share price, after more capital is raised through equity funding?

• Nothing

• The share price drops

• The share price increases

What are the main limitations of the theory?

• It's not up to date, as new hybrid instruments of finance are neglected

• Information asymmetry is not existent anymore (reporting standards)

• It is only applicable for large corporations

Which financing option is the most disadvantageous according to the theory?

• Equity

• Internal financing

• Debt

Which finance option is the cheapest?

• Retained earnings

• Equity issuance

• Debt issuance

Do you agree with the pecking order theory?

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