The pecking-order theory of capital structure depicts the fact that firms prefer internal financing to avoid sending out adverse signals that may lower the stock price.

Question

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The statement accurately describes the pecking-order theory, which suggests that companies prefer to use internal financing (such as retained earnings) before resorting to external financing (such as issuing new stock or bonds). This is based on the idea that external financing can send out negative signals to investors, signaling that the company may not be able to generate enough internal funds to support its growth. This can lead to a lower stock price and higher borrowing costs, both of which can be detrimental to the company's financial health.

The Pecking-Order Theory of Capital Structure Depicts the Fact That