A theory explaining how companies prioritize financing sources, preferring internal funds first, then debt, and finally equity as a last resort. It suggests this hierarchy exists due to information asymmetries and signaling effects.
Named after the social hierarchy observed in chickens, first described by Norwegian zoologist Thorleif Schjelderup-Ebbe in the 1920s. Stewart Myers applied this concept to corporate finance in 1984 to explain financing behavior patterns.
The pecking order explains why profitable companies often have low debt ratios - not because debt is bad, but because they don't need it! It also explains why equity issuances often cause stock prices to drop, as investors interpret it as a signal that management thinks the stock is overvalued.
Named after avian dominance hierarchies, the metaphor masks that 'pecking order' (originally the ranking of hens by aggression) obscures how corporate financing decisions reflect power structures often excluding women from capital allocation decisions historically.
Use the term as established financial theory, but remain aware it normalizes hierarchical thinking and can reinforce insider/outsider dynamics that have historically marginalized women investors and entrepreneurs.
["hierarchy theory","preference ranking theory","dominance structure theory"]
Women were systematically excluded from venture capital and corporate financing until recently; the naturalized hierarchy implied by 'pecking order' invisibly encoded this exclusion as inevitable rather than structural.
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