What are the implications of Pecking-order theory?

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Question:What are the limplications of pecking order theory?

Ans:The first implication of this theory is that a company may end up not having a target capital structure. This implies that the capital structure of a company will always be as a reslut of a series of financing choices which are short-term in nature rather than long-term term ones. Financial choices which are short-term in nature tend to decide only more desirable items on the pecking order at a given point.

The second implications of this theory is that debt will be utilized by company's which are highly profitable less frequently. This is so since most companies which are highly profitable tend to have retained earnings which are large thereby reducing the need for financial from external sources.

The last implications of this theory is that company's preference will shifts to financial capacity. This is so since this theory is as a result of the cost associated with obtaining financial. For this reason this theory reason that whenever the financial capacity is obtainable in advance capital structure

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