It is common practice in the United States that a firm would internal equity rather than external capital to finance its investment. When intenal fund is not enough, the firm prefers using debt to issuing new shares of stock. This paper first surveys the related literature of asymmetric information, agency theory and business strategy, then concludes that the current financial theory supports this ”pecking order” characterization of capital structure. This paper also studies the financing behavior of Taiwanese firms and shows that the empirical findings in Taiwan are consistent with the pecking order theory.
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