Essay: The pecking order theory

Essay: The pecking order theory

Another approach these companies can take to deal with their capital structure would be to utilize the pecking order theory. This requires companies to adhere to the hierarchy of financing Ludwig, (2000).

This implies that the company will prefer to finance itself internally, when all internal finances are used up it will use equity, therefore this supports the fact that debts are preferred by companies than equity. An example is ford which has over the years financed itself internally. When their internal finances are depleted they turn to equity for financing. Never in their history has the company been known to use outside financing like government loans.

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