In the theory of firm's capital structure and financing decisions, the Pecking Order Theory or Pecking Order Model was developed by Stewart C. Myers in 1984. It states that companies prioritize their sources of financing (from internal financing to equity) according to the law of least effort, or of least resistance, preferring to raise equity as a financing means “of last resort”. Hence, internal funds are used first, and when that is depleted, debt is issued, and when it is not sensible to issue any more debt, equity is issued. This theory maintains that businesses adhere to a hierarchy of financing sources and prefer internal financing when available, and debt is preferred over equity if external financing is required.


Tests of the Pecking Order Theory have not been able to show that it is of first order importance in determining firm's capital structure; however, several authors have also been able to find that there are instances where it is a good approximation to reality.