According to the Pecking Order Theory of financial management, what is a firm’s first priority source of capital when financing new projects?

Explanation

• Pecking Order Theory (Myers and Majluf) posits that firms follow a financing hierarchy to minimize asymmetric information costs.
• The order of preference is: 1) Internal Retained Earnings, 2) External Debt, and 3) External Equity (issued as a last resort).
• Issuing new equity signals potential overvaluation to the market, leading to adverse selection costs.