Pecking Order Theory Of Capital Structure: Another Way To Look At It

Constructing the capital structure of business organization depends on quite very many perspectives and theories. One of these outlooks is the pecking order approach to capital structure construction. The approach is yet to have seemingly homogenous test both qualitative and quantitative. The non-homogeneity posture has been traced to methodology of analysis and assumptions of adverse selection and moral hazards (Meier and Tarhan, 2007). It is the view of this author that, methodology apart, at least two other probable rationales for pecking order model are, 1) avoidance of share ownership dilution by firm managers to maintain status quo and retain the confidence of firm owners, and 2) to make managers (agents) remain on the path of efficient resource management, to maximize shareholders’ wealth and at the same time resolve agency problems between shareholders and bondholders (Jensen and Meckling, 1976 and Jensen, 1986). Concomitant to this is the possibility of adopting pecking order as fall out from the necessities of agency theory where increasing leverage is taken as a way of making managers to be cautiously responsible in the utilization of resources and incurring managerial slack expenses. In the final analysis the incidental increase in the gearing level of the firm up to the point where benefits from tax deductibility of interest on debts and bankruptcy costs are equal will maximize firm value.