Pecking Order Theory

Pecking Order Theory is a financial concept that suggests companies prefer to fund their operations in a specific order. They first use internal resources, like retained earnings, because it's cheaper and involves no outside control. If more funds are needed, they turn to debt since it's less expensive than equity. Finally, if they have to issue new shares, they do so as a last resort, as it can dilute existing ownership. This hierarchy reflects a preference for minimizing costs and maintaining control over the company’s finances.