The pecking-order theory suggests that less profitable firms borrow more because:
A) equity issues are more expensive.
B) leverage is preferred over raising funds internally.
C) debt issues are good omens.
D) they have insufficient internal funds.

Question

Quizplus · Accepted Answer

The pecking-order theory suggests that firms prefer to use internal funds to finance investments, followed by debt financing, and finally equity financing as a last resort. When less profitable firms have insufficient internal funds to finance their investments, they are more likely to turn to debt financing, resulting in higher levels of borrowing compared to more profitable firms.

The Pecking-Order Theory Suggests That Less Profitable Firms Borrow More