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prospects than do investors. Two surveys examined capital structure decisions.12 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 overthe-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
At first glance, on the basis of financial theory, this choice appears to be
inconsistent with wealth maximization goals, but Stewart Myers has explained
how “asymmetric information” could account for the pecking order financing
preferences of financial managers.13 Asymmetric information results when managers of a firm have more information about operations...
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- Spring '14