Framework

Pecking order theory

The question it answers

When a new project needs funding, should the CFO use retained earnings, take on debt or issue new shares, and why do shares usually come last?

Origin
Myers and Majluf (1984); Myers (1984)
Diagram type
Process by phase
Level of analysis
Firm
Topics
Corporate finance
Stack of clay coins beside a rising glass bar chart, icon for finance

Diagram

Pecking order theory

  1. Order of funding
  2. Retained earningsNo signalling problem
  3. DebtMild signal
  4. New equityInvestors read it as bad news; leverage is the sum of funding gaps, not a target ratio

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Myers, S.C. (1984) ‘The capital structure puzzle’, Journal of Finance, 39(3), pp. 575–592.doi:10.2307/2327916Source page
  2. Myers, S.C. and Majluf, N.S. (1984) ‘Corporate financing and investment decisions when firms have information that investors do not have’, Journal of Financial Economics, 13(2), pp. 187–221.doi:10.1016/0304-405x(84)90023-0Source page