The major assumption of pecking order theory is the asymmetric information. This states that managers know more than the shareholders/investors and are very precarious while changing the target capital structure.

As per the pecking order theory, managers first use internal equity to fund the projects followed by the debt. Firms use external equity as last resort because it's cost is higher than the former two because investors see this as negative. Hence, managers will use extenal equity as last resort.