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Homework answers / question archive / The pecking order theory of capital structure rests on an assumption of: 1
The pecking order theory of capital structure rests on an assumption of:
1. Agency costs
2. Barriers to entry
3. Asymmetric information
4. Tax shields cost of financial distress
The correct answer is (3) Asymmetric information
According to the pecking order theory, the cost of financing business activity is influenced by asymmetric information. In specific, this theory postulates that the cost of finances increases with asymmetric information. Therefore, pecking order theory rest on assumption of asymmetric information. For this reason, the firm will prefer internal sources of capital before outsourcing capital.
