The pecking order hypothesis states that managers will have a preference to fund investment by using ________, followed by ________, and will issue ________ as a last resort.
A) debt, equity, retained earnings
B) retained earnings, equity, debt
C) retained earnings, debt, equity
D) debt, retained earnings, equity

Question

Quizplus · Accepted Answer

The pecking order hypothesis suggests that managers prefer to finance investment using internal funds such as retained earnings before turning to external financing. When external financing is necessary, they prefer to issue debt before equity because issuance costs and adverse selection costs are lower for debt than equity. Therefore, the correct order is retained earnings (internal funds) first, then debt, and finally equity.

The Pecking Order Hypothesis States That Managers Will Have a Preference