pecking order

The pecking order in finance is a financial decision making framework created to avoid the informational differences between external investors and executives. Also, the pecking order can represent a hierarchy of individuals for decision making purposes or responsibility for actions/activities.

The main idea behind Pecking Order theory is to avoid the information differences between external investors and executives, because the external investors have less information about the company´s situation.

The pecking order for financial decisions is:
- Internal financing: this gives priority to the internal financing because the company considers that these financial needs are not affected by information differences.
- External financing through debt: this can mean to issue company debt.
- Use of equity: equity owner are directly affected while having the least amount of knowledge.