The pecking order theory:

Question

Quizplus · Accepted Answer

The pecking order theory states that companies prefer to finance their projects from internal funds (retained earnings) first, followed by debt financing and then equity financing. This implies that a company's leverage will depend on the difference between its operating cash flow and its investment needs over time (B). Additionally, the theory predicts that a company's leverage will be negatively related to its profitability (C) and announcing a new share issue can signal that the company does not have enough internally generated funds to finance its projects, resulting in a drop in share price (A). Therefore, all of the given options are correct.

The Pecking Order Theory