When firms generate sufficient cash to fund their investments and choose not to issue debt or equity,instead relying on retained earnings,this is an example of:

Question

Quizplus · Accepted Answer

This scenario is an example of the pecking order hypothesis, which suggests that firms prefer to finance their investments in a specific order: first with retained earnings, then debt, and finally equity. The hypothesis argues that firms prefer retained earnings because issuing debt or equity can signal negative information to the market or result in higher agency costs.

When Firms Generate Sufficient Cash to Fund Their Investments and Choose