What is Pecking Order Theory Pecking order theory is one of several theories related to the capital structure Capital structure is a comparison between capital vs debt. Pecking order theory was discovered by Donaldson in 1984 which was later refined by Myers and Majluf. Pecking order theory states that companies tend to seek funds that have a low risk. The risk of declining corporate value. The fall in stock prices. The pecking order theory prefers funding from internal funds source rather than external source. There is no optimal capital structure in the pecking order theory because the selection of corporate funding is based on the order of risk preference (hierarchy). Sort order of funding. The company's funding can be obtained from at least 3 sources. Retained earning Debt Equity (issuance of new stocks) Hierarchy of pecking order theory First, the company will prioritize risk-free financing, and then the company chooses low-risk funds, and the last alter...