9 the pecking order theory of capital structure the

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Unformatted text preview: site as profitable firms have a larger scope for tax shields and therefore subsequently should have higher debt levels). Download free ebooks at bookboon.com 65 Corporate Finance Corporate financing and valuation 8.9 The pecking order theory of capital structure The pecking order theory has emerged as alternative theory to the trade-off theory. Rather than introducing corporate taxes and financial distress into the MM framework, the key assumption of the pecking order theory is asymmetric information. Asymmetric information captures that managers know more than investors and their actions therefore provides a signal to investors about the prospects of the firm. The intuition behind the pecking order theory is derived from considering the following string of arguments: – – If the firm announces a stock issue it will drive down the stock price because investors believe managers are more likely to issue when shares are overpriced. Therefore firms prefer to issue debt as this will allow the firm to raise funds without send...
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This note was uploaded on 10/26/2012 for the course 19 19 taught by Professor - during the Spring '12 term at Sunway University College.

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