By including appropriate provisions in the loan

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Unformatted text preview: nts placed on it by the loan provisions, the firm should benefit by obtaining funds at a lower cost. Asymmetric Information pecking order A hierarchy of financing that begins with retained earnings, which is followed by debt financing and finally external equity financing. asymmetric information The situation in which managers of a firm have more information about operations and future prospects than do investors. Two surveys examined capital structure decisions.18 Financial executives were asked which of two major criteria determined their financing decisions: (1) maintaining a target capital structure or (2) following a hierarchy of financing. This hierarchy, called a pecking order, begins with retained earnings, which is followed by debt financing and finally external equity financing. Respondents from 31 percent of Fortune 500 firms and from 11 percent of the (smaller) 500 largest over-the-counter firms answered target capital structure. Respondents from 69 percent of the Fortune 500 firms and 89 percent of the 500 largest OTC firms chose the pecking order. At fi...
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This document was uploaded on 01/19/2014.

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