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

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The pecking-order theory of capital structure suggests that firms prefer internal financing, such as retained earnings, over external financing, such as issuing new shares or debt, to avoid sending out adverse signals that may lower the stock price. This theory assumes that investors and analysts view external financing as a negative signal of the firm's financial health and future prospects, which could lead to a decline in the stock price. Therefore, the theory suggests that firms should exhaust their internal funds first before resorting to external financing.

The Pecking-Order Theory of Capital Structure States That Firms Prefer