PECKING‐ORDER THEORY REVISITED: THE ROLE OF AGENCY COST

Kuang‐cheng A. Wang and Chun‐hung A. Lin

Manchester School, 2010, vol. 78, issue 5, 395-411

Abstract: Considering conflicts between shareholders and managers, we revisit the external pecking order of corporate financing under conditions of information asymmetry. With the possibility that debt financing may lead a firm to bankruptcy, we find first that the external pecking order could be reversed. Second, pooling equilibria also exist in our model in two forms: debt issuance and equity issuance. Our results modify pecking‐order theory and explain some empirical findings of Jung et al. (Journal of Financial Economics, Vol. 42 (1996), pp. 159–185).

Date: 2010
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