Pecking Order Theory in Finance
Donaldson observed that firms prefer first to finance investment with retained earnings, then, when they need outside funding, they prefer to issue severe debt instead of equity. It suggests that capital structures are determined largely by the history of needs for external finance. Pecking-order theory explains negative intra-industry correlation between profitability and debt to equity ratio, and the negative share price reaction on announcement of an equity issue (i.e. information asymmetric).
Read more about this topic: Pecking Order
Famous quotes containing the words order, theory and/or finance:
“It is the final proof of God’s omnipotence that he need not exist in order to save us.”
—Peter De Vries (b. 1910)
“There could be no fairer destiny for any physical theory than that it should point the way to a more comprehensive theory in which it lives on as a limiting case.”
—Albert Einstein (1879–1955)
“Imperialism is capitalism at that stage of development at which the dominance of monopolies and finance capitalism is established; in which the export of capital has acquired pronounced importance; in which the division of the world among the international trusts has begun, in which the division of all territories of the globe among the biggest capitalist powers has been completed.”
—Vladimir Ilyich Lenin (1870–1924)