The Pecking Order Theory of Capital Structure: Where Do We Stand?
42 Pages Posted: 14 Mar 2020 Last revised: 23 Mar 2020
Date Written: February 19, 2020
The pecking order theory of corporate capital structure states that firms finance deficits with internal resources when possible. If internal funds are inadequate, firms obtain external debt. External equity is the last resort. Some financing patterns in the data are consistent with pecking order: firms with moderate deficits favor debt issues; firms with very high deficits rely much more on equity than debt. Others are not: many equity issuing firms do not seem to have entirely used up the debt capacity; some firms with a surplus do issue equity. The theory suggests a sharp discontinuity of financing methods between surplus firms and deficit firms and another at the debt capacity. The literature provides little support for the predicted threshold effects.
Keywords: pecking order, net equity issues, net debt issues, financing deficit
JEL Classification: G32
Suggested Citation: Suggested Citation