Question

What is the role of debt is the pecking order theory of capital structure? How does it differ under the stulz (1990) model?

Answer 1

The role of debt is the pecking order theory of capital structure are-

The pecking order theory states that a company should prefer to finance itself first internally through retained earnings. If this source of financing is unavailable, a company should then finance itself through debt. This pecking order is important because it signals to the public how the company is performing. An obvious implication of the pecking order theory is that highly profitable firms that generate high earnings are expected to use less debt capital than those that are not very profitable. So here the debt component will be minimal.

Hierarchy theory states that companies must first raise internal funds through retained earnings. If this source of funding is not available, companies will have to raise funds through debt. Finally, as a last resort, companies should raise capital by issuing new shares.

In hierarchy theory, companies prioritize their funding sources (from internal funding to equity) and view equity funding as a last resort. Internal funds are used first, and debt is used when they are exhausted. Equity is issued when issuing more bonds is unwise.

Learn more about debt here: brainly.com/question/24814852

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