A survey of Fortune 500 firms indicates that they prefer internal financing (retained earnings) to external financing. This preference is known as ____.
A) financial slack
B) the pecking order theory
C) capital structure theory
D) asymmetric capital

Question

Quizplus · Accepted Answer

The preference of Fortune 500 firms for internal financing over external financing is indicative of the pecking order theory, which suggests that firms prefer to use internal funds followed by debt financing and then equity financing, in that order. This theory suggests that firms have a hierarchy of financing preferences, with retained earnings being the most preferred because it is seen as the least costly and least risky form of financing.

A Survey of Fortune 500 Firms Indicates That They Prefer