The pecking order theory of capital structure implies that:
I.high-risk firms will end up borrowing more;
II.firms prefer internal finance;
III.firms prefer debt to equity when external financing is required
A)I only
B)II only
C)II and III only
D)III only

Question

Quizplus · Accepted Answer

The pecking order theory states that firms prioritize internal finance (retained earnings) over external financing, and when external financing is required, they prefer debt to equity. This means that Option II is true, and III is also true as firms prefer debt over equity when they resort to external financing. However, high-risk firms may not be favored while borrowing, and so I is not always true.

The Pecking Order Theory of Capital Structure Implies That