Pecking Order Model of Corporate Financing: Review of Literature

Abstract

This paper reviews the literature on a firm’s capital structure that is driven by asymmetric information. One of the most popular models of firm’s financing decisions under an asymmetry in the literature is the pecking order theory (POT) of Myers (1984). It is based on the argument that firms have preference ranking over sources of funds for financing based on the corresponding information asymmetry costs (Myers et al. 1984, p.15). In recent studies, many interesting discussions have been generated about the POT. These studies attempt to detect the extent to which the POT describes the financing choices of firms. The results of relevant studies about the POT are presented here, in this literature review.