We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is the Pecking Order Theory?

Malcolm Tatum
Updated Jan 23, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Also known as the Pecking Order Model, the Pecking Order Theory is an approach to defining the capital structure of a company, as well as how the business goes about the process of making financial decisions. First developed by Nicola Majluf and Stewart C. Myers in 1984, the theory seeks to explain how companies prioritize their financing sources. The general idea is that companies will tend to take the course of least resistance, obtaining financing from sources that are readily available, and then steadily moving on to sources that may be more difficult to utilize.

While the specifics of the Pecking Order Theory are somewhat involved, the general idea can be explained by using the example of a local business entity. When it comes to financing the operation, the business is likely to make use of its internal resources first, such as using funds in a savings or other interest bearing account to manage operational costs or to order more stock or raw materials for use in the operation. When this first line of financing is exhausted or not available for some reason, the business will then turn to lenders or investors as a means of generating the funds needed to keep the company going. When no other options are available, the business may choose to make use of the equity found in any assets held by the business.

With this approach, the theory shows that the business chose to take the past of least resistance when it came to financing. Resources that were readily available were used first, since they did not involve encumbering any of the company holdings with debt. Next, the business moved on to issuing stock or a bond issue as means to raise money while still not encumbering company assets. If necessary, the business would then go for unsecured loans that left the business free to use its assets in any way deemed proper. Finally, the business resorts to financing methods that do impact company assets directly, such as trading off equity for cash or taking on a collateralized loan.

While the Pecking Order Theory holds that companies do tend to manage financing using the easiest approaches first, it does not really imply that one mode of financing is inherently superior to the other. Depending on the circumstances of a business, it may be prudent to use an asset to acquire a secured loan rather than deplete interest-bearing accounts in the possession of the business. Business owners may tend to weigh all available options and then choose the one that is most likely to produce the result that will be in the best interests of the company over the long-term, rather than simply going with what appears to be the easiest solution at present.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum , Writer
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Discussion Comments

Malcolm Tatum

Malcolm Tatum


Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.