The pecking order states how financing should be raised. In order to avoid asymmetric information problems and misinterpretation of whether management is sending a signal on security overvaluation,the firm's first rule is to:
A) finance with internally generated funds.
B) always issue debt then the market won't know when management thinks the security is overvalued.
C) issue new equity first.
D) issue debt first.
E) None of these.

Question

Quizplus · Accepted Answer

The best choice is to finance with internally generated funds. This helps to avoid asymmetric information problems and misinterpretation of management's signals on security overvaluation. By using internally generated funds, the firm does not have to rely on the market to raise capital and does not send a signal on the valuation of the firm's securities.

The Pecking Order States How Financing Should Be Raised