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What does the Pecking Order Theory suggest regarding firms' capital structure?
What does the Pecking Order Theory suggest regarding firms' capital structure?
- Firms should aim for an optimal capital structure.
- Firms should rely on debt financing only.
- Firms should always select the financing option with the lowest cost. (correct)
- Firms should prioritize equity financing regardless of cost.
What are adverse selection costs primarily caused by in the context of financing?
What are adverse selection costs primarily caused by in the context of financing?
- Growth opportunities
- Inflation rates
- Information asymmetry (correct)
- High interest rates
What does information asymmetry refer to in the context of the Pecking Order Theory?
What does information asymmetry refer to in the context of the Pecking Order Theory?
- Perfect knowledge of all parties involved
- No access to relevant information by any party
- An equal distribution of information among all stakeholders
- A situation where only the seller has more information than the buyer (correct)
How can a seller potentially take advantage in a situation of information asymmetry?
How can a seller potentially take advantage in a situation of information asymmetry?
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What could be a consequence if a seller is willing to accept a low price for high-quality items?
What could be a consequence if a seller is willing to accept a low price for high-quality items?
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In the context of financing, what might happen if a firm aims for an optimal capital structure ignoring costs?
In the context of financing, what might happen if a firm aims for an optimal capital structure ignoring costs?
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How can adverse selection impact firms' financing decisions according to the Pecking Order Theory?
How can adverse selection impact firms' financing decisions according to the Pecking Order Theory?
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What is one potential consequence of information asymmetry in a market transaction?
What is one potential consequence of information asymmetry in a market transaction?
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