Article of the Day Pecking Order A pecking order is a basic pattern of social organization within a flock of poultry in which dominance is established by aggression—members maintain their status by pecking those lower in rank without fear of retaliation and by submitting to pecks from those of higher rank. Nowadays, the term is used somewhat colloquially to describe social hierarchies among other creatures, including humans, and has even been applied to the finance industry. Who coined the term? Pecking order theory in finance Donaldson[citation needed] observed that firms prefer first to finance investment with retained earnings, then, when they need outside funding, they prefer to issue severe debt instead of equity. It suggests that capital structures are determined largely by the history of needs for external finance. Pecking order theory explains negative intra-industry correlation between profitability and debt to equity ratio, and the negative share price reaction on announcement of an equity issue (i.e. information asymmetric).
Posted on: Wed, 27 Nov 2013 14:14:59 +0000
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