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pecking order theory

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Definition of pecking order theory

Pecking Order Theory Image 1

pecking order theory

Firms prefer to issue debt rather than equity if internal finance is insufficient.



Related Terms:

Agency theory

The analysis of principal-agent relationships, wherein one person, an agent, acts on behalf of
anther person, a principal.


Arbitrage Pricing Theory (APT)

An alternative model to the capital asset pricing model developed by
Stephen Ross and based purely on arbitrage arguments.


Bubble theory

Security prices sometimes move wildly above their true values.


Buy limit order

A conditional trading order that indicates a security may be purchased only at the designated
price or lower.
Related: Sell limit order.


Cross-border risk

Refers to the volatility of returns on international investments caused by events associated
with a particular country as opposed to events associated solely with a particular economic or financial agent.



Day order

An order to buy or sell stock that automatically expires if it can't be executed on the day it is entered.


Discrete order picking

A picking method requiring the sequential completion of
each order before one begins picking the next order.


Pecking Order Theory Image 2

economic order quantity

order size that minimizes total inventory costs.


Economic order quantity (EOQ)

The order quantity that minimizes total inventory costs.


economic order quantity (EOQ)

an estimate of the number
of units per order that will be the least costly and provide
the optimal balance between the costs of ordering
and the costs of carrying inventory


engineering change order (ECO)

a business mandate that changes the way in which a product is manufactured or a
service is performed by modifying the design, parts,
process, or even quality of the product or service


expectations theory of exchange rates

theory that expected spot exchange rate equals the forward rate.


Fill or kill order

A trading order that is canceled unless executed within a designated time period.
Related: open order.


job order cost sheet

a source document that provides virtually
all the financial information about a particular job;
the set of all job order cost sheets for uncompleted jobs
composes the Work in Process Inventory subsidiary ledger


job order costing system

a system of product costing used
by an entity that provides limited quantities of products or
services unique to a customer’s needs; focus of recordkeeping
is on individual jobs


Limit order

An order to buy a stock at or below a specified price or to sell a stock at or above a specified
price. For instance, you could tell a broker "Buy me 100 shares of XYZ Corp at $8 or less" or to "sell 100
shares of XYZ at $10 or better." The customer specifies a price and the order can be executed only if the
market reaches or betters that price. A conditional trading order designed to avoid the danger of adverse
unexpected price changes.


Limit order book

A record of unexecuted limit orders that is maintained by the specialist. These orders are
treated equally with other orders in terms of priority of execution.


Liquidity theory of the term structure

A biased expectations theory that asserts that the implied forward
rates will not be a pure estimate of the market's expectations of future interest rates because they embody a
liquidity premium.



Local expectations theory

A form of the pure expectations theory which suggests that the returns on bonds
of different maturities will be the same over a short-term investment horizon.


Make-to-order

A production scheduling system under which products are only
manufactured once a customer order has been received.


Market order

This is an order to immediately buy or sell a security at the current trading price.


Market segmentation theory or preferred habitat theory

A biased expectations theory that asserts that the
shape of the yield curve is determined by the supply of and demand for securities within each maturity sector.


Modern portfolio theory

Principles underlying the analysis and evaluation of rational portfolio choices
based on risk-return trade-offs and efficient diversification.


money order

A guaranteed form of payment in amounts up to and including $5,000. You might request a money order in order to pay for tuition fees at a university or a college, or for a magazine subscription.


Negotiable order of withdrawal (NOW)

Demand deposits that pay interest.


Normal backwardation theory

Holds that the futures price will be bid down to a level below the expected
spot price.


Open (good-til-cancelled) order

An individual investor can place an order to buy or sell a security. That
open order stays active until it is completed or the investor cancels it.


open purchase ordering

a process by which a single purchase
order that expires at a set or determinable future
date is prepared to authorize a supplier to provide a large
quantity of one or more specified items on an as-requested
basis by the customer



Order penetration point

The point in the production process when a product is
reserved for a specific customer.


Order picking

The process of moving items from stock for shipment to customers.


order point

the level of inventory that triggers the placement
of an order for additional units; it is determined based
on usage, lead time, and safety stock


ordering cost

the variable cost associated with preparing,
receiving, and paying for an order


Pecking-order view (of capital structure)

The argument that external financing transaction costs, especially
those associated with the problem of adverse selection, create a dynamic environment in which firms have a
preference, or pecking-order of preferred sources of financing, when all else is equal. Internally generated
funds are the most preferred, new debt is next, debt-equity hybrids are next, and new equity is the least
preferred source.


Preferred habitat theory

A biased expectations theory that believes the term structure reflects the
expectation of the future path of interest rates as well as risk premium. However, the theory rejects the
assertion that the risk premium must rise uniformly with maturity. Instead, to the extent that the demand for
and supply of funds does not match for a given maturity range, some participants will shift to maturities
showing the opposite imbalances. As long as such investors are compensated by an appropriate risk premium
whose magnitude will reflect the extent of aversion to either price or reinvestment risk.


Pure expectations theory

A theory that asserts that the forward rates exclusively represent the expected
future rates. In other words, the entire term structure reflects the markets expectations of future short-term
rates. For example, an increasing sloping term structure implies increasing short-term interest rates. Related:
biased expectations theories


Quantity Theory of Money

theory that velocity is constant, and so a change in money supply will change nominal income by the same percentage. Formalized by the equation Mv = PQ.


random walk theory

Security prices change randomly, with no predictable trends or patterns.


Real Business Cycle Theory

Belief that business cycles arise from real shocks to the economy, such as technology advances and natural resource discoveries, and have little to do with monetary policy.


Sell limit order

Conditional trading order that indicates that a, security may be sold at the designated price or
higher. Related: buy limit order.


special order decision

a situation in which management must determine a sales price to charge for manufacturing or service jobs outside the company’s normal production/service market


Static theory of capital structure

theory that the firm's capital structure is determined by a trade-off of the
value of tax shields against the costs of bankruptcy.


Stop-limit order

A stop order that designates a price limit. In contrast to the stop order, which becomes a
market order once the stop is reached, the stop-limit order becomes a limit order once the stop is reached.


Stop-loss order

An order to sell a stock when the price falls to a specified level.


Stop order (or stop)

An order to buy or sell at the market when a definite price is reached, either above (on a
buy) or below (on a sell) the price that prevailed when the order was given.


theory of constraints (TOC)

a method of analyzing the bottlenecks
(constraints) that keep a system from achieving
higher performance; it states that production cannot take
place at a rate faster than the slowest machine or person
in the process


trade-off theory

Debt levels are chosen to balance interest tax shields against the costs of financial distress.



 

 

 

 

 

 

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