Pecking-order view (of capital structure)
The argument that external financing transactions costs, especially those associated with the problem of adverse selection, create a dynamic environment in which firms have a preference, or pecking-order of preferred sources of financing, when all else is equal. Internally generated funds are the most preferred, followed by new debt, and debt-equity hybrids. Finally, new equity is at the least preferred source.
Copyright © 2011 Campbell R. Harvey, Professor of Finance, Fuqua School of Business at Duke University