The pecking order theory of capital structure predicts that:
A)if two firms are equally profitable,the more rapidly growing firm will borrow more,other things equal.
B)firms prefer equity to debt financing.
C)firms prefer financing by debt versus internally generated cash.
D)high-risk firms will end up borrowing more.

Question

Quizplus · Accepted Answer

The pecking order theory suggests that in order to avoid information asymmetry and adverse selection problems, firms first use internally generated funds, then debt financing, and finally equity financing. If two firms are equally profitable, the theory predicts that the firm with faster growth opportunities will have a higher investment need and will therefore prefer more debt financing. This is because high-growth firms might face more difficulty in satisfying their investment needs with internally generated funds alone.

The Pecking Order Theory of Capital Structure Predicts That