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Financial Analysis

  Financial Analysis   |   Terms
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  • January 28, 2021
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Pecking Order Approach

A sequence of possible sources a company may resort to raise financing. This approach recommends to finance first with retained earnings, second with payables and bank loans, third with bonds and other similar instruments, and fourth with common stock issues. The pecking order approach advocates raising funds in the order of low to high flotation costs (so to keep these costs at their lowest). Furthermore, by giving the last slot in the order to stock issues, a company can avoid the negative side effect usually associated with the announcement of a stock issue as it is typical that investors infer from stock issues that the stock is overvalued.


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