The Pecking Order Theory : A Research Note on the 'Pure' Version

Apart from the static trade-off views, there is the pecking order view in explaining firms' financing decisions. Firms' capital issuing activity can be viewed as selling of financial products (i.e., debt or equity) to buyers, who do not completely know about the products. At asymmetric distribution of information between buyers and sellers, Akerlof (1970) shows that information asymmetry may arise on borrowing and lending activity if there is uncertainty about quality of financial products, and the buyers and sellers undertake adverse decision than that they could opt for if there were no information asymmetry. In an ex-ante equilibrium, buyers stick to 'lemons' and price them at discount while sellers find no market at premium for the 'better' products. However, the 'pure' pecking order model appears in Myers & Majluf (1984)