Pecking-Order Theory
Myers + Majluf 1984 framework explaining the empirical preference for internal finance > debt > equity. Information asymmetry between managers and outside investors makes equity issuance the most expensive financing source (the market discounts new equity to compensate for what managers might know that investors do not), so firms exhaust internal cash + debt capacity before they ever issue equity. Predicts the empirical negative correlation between profitability and leverage (profitable firms self-fund, low-leverage; unprofitable firms must borrow, high-leverage) — the single sharpest empirical test that distinguishes pecking-order from static tradeoff theory.
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Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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