Pecking-Order View (of Capital Structure)

Pecking-Order View (of Capital Structure)

A theory stating that, all other things being equal, companies seeking to finance a new project or product have a hierarchy of preferred financing options. This hierarchy (or pecking-order) goes from the most preferred to the lease preferred: internal funding (or simply financing a project or product out-of-pocket), debt issuance, debt-equity hybrid issuance, and equity issuance. The pecking-order view states that the hierarchy is structured this way because of the transaction costs involved in each form of financing. That is, internal funding has a lower transaction cost that debt issuance and so forth.