The pecking order theory helps to explain why companies:
A)pursue a target debt/equity ratio.
B)issue ordinary shares as a last resort to finance investments.
C)will issue debt following a substantial increase in its share price.
D)do not issue new shares.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that companies prefer to finance their investments from internal funds first, followed by debt, and finally, as a last resort, by issuing new equity. This is because raising new equity can dilute existing shareholders and potentially lower the company's stock price, and therefore is considered the least desirable option for financing.

The Pecking Order Theory Helps to Explain Why Companies