# Pecking Order Theory

*Corporate Finance & M&A — Finicade finance glossary*

Pecking order theory says firms prefer internal funds first, then debt, and issue equity only as a last resort. The driver is information asymmetry: management issues shares when it believes they're overvalued, so the market reads any equity issue as a negative signal and marks the price down. That reaction is empirically robust and explains why profitable firms often carry the least debt.

**Also known as:** pecking order, financing hierarchy

**Related terms:** [Capital Structure](https://finicade.com/glossary/capital-structure), [Modigliani-Miller Theorem](https://finicade.com/glossary/modigliani-miller-theorem), [Rights Issue](https://finicade.com/glossary/rights-issue), [Adverse Selection](https://finicade.com/glossary/adverse-selection), [Cost of Debt](https://finicade.com/glossary/cost-of-debt)

Source: https://finicade.com/glossary/pecking-order-theory