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BRILLIANT’S Capital Structure Theories 359

external financing is required (equity would E³gQ>Z©b ’$m¶Z|qgJ H$s Amdí¶H$Vm hmoVr h¡ (B{³dQ>r H$m
mean issuing shares which meant 'bringing AW© eo¶g© Omar H$aZm h¡ {OgH$m AW© H§$nZr ‘| '~mhar
external ownership' into the company). Thus, ñdm{‘Ëd bmZm' h¡)& Bg àH$ma S>oãQ> H$m ê$n {Ogo g§ñWm
the form of debt a firm chooses can act as a MwZVr h¡ E³gQ>Z©b ’$m¶Z|g Ho$ {bE BgH$s Amdí¶H$Vm Ho$
signal of its need for external finance. g§Ho$V Ho$ ê$n ‘| H$m¶© H$a gH$Vm h¡&
The pecking order theory is popularized n¡qH$J Am°S>©a ϶moar ‘m¶g© VWm ‘Obw’$ (1984)
by Myers and Majluf (1984) where they argue Ûmam bmoH${ච~Zm¶r J¶r h¡ {Og‘| CÝhm|Zo VH©$ {X¶m h¡ {H$
that equity is a less preferred means to raise B{³dQ>r H¡${nQ>b àmá H$aZo H$m H$‘ dar¶Vm H$m gmYZ h¢
capital because when managers (who are
³¶m|{H$ O~ ‘¡ZoOg© ({OÝh| {ZdoeH$m| H$s Anojm g§ñWm H$s
assumed to know better about true condition
of the firm than investors) issue new equity, dmñV{dH$ pñW{V Ho$ ~mao ‘| A{YH$ OmZZo dmbm ‘mZm OmVm
investors believe that managers think that the h¡) Z¶r B{³dQ>r Omar H$aVo h¡, {ZdoeH$m| H$m {dídmg hmoVm
firm is overvalued and managers are taking h¡ {H$ ‘¡ZoOg© gmoMVo h¢ {H$ g§ñWm H$m A{YH$ ‘yë¶ bJm¶m
advantage of this over-valuation. As a result, J¶m h¡ VWm ‘¡ZoOg© BgH$m bm^ bo aho h¢& n[aUm‘ñdê$n
investors will place a lower value to the new
equity issuance. NPP {ZdoeH$ Z¶o B{³dQ>r Bí¶yE§g H$mo H$‘ ‘yë¶ na aI|Jo&
Theory {gÕmÝV
Pecking order theory starts with asymm- n¡qH$J Am°S>©a ϶moar E{g‘o{Q´>H$ B§’$m°‘}eZ go àma§^
etric information as managers know more hmoVr h¡ ³¶m|{H$ ‘¡ZoOg© ~mhar {ZdoeH$m| H$s Anojm CZH$s
about their company's prospects, risks and
H§$nZr H$s g§^mdZm, Omo{I‘ VWm ‘yë¶ Ho$ ~mao ‘| A{YH$
value than outside investors. Asymmetric
information affects the choice between internal OmZVo h¢& E{g‘o{Q´>H$ B§’$m°‘}eZ B§Q>Z©b VWm E³gQ>Z©b
and external financing and between the issue ’$m¶Z|qgJ Ho$ ~rM VWm S>oãQ> ¶m B{³dQ>r Ho$ Bí¶y Ho$ ~rM
of debt or equity. Therefore, there exists a MwZmd H$mo à^m{dV H$aVm h¡ & AV… Z¶o àmoOo³Q²>g H$s
pecking order for the financing of new projects. ’$m¶Z|qgJ Ho$ {bE EH$ n¡qH$J Am°S>©a {dÚ‘mZ hmoVm h¡&
Asymmetric information favours the issue E{g‘o{Q´>H$ B§’$m°‘}eZ B{³dQ>r na S>oãQ> Ho$ Bí¶y H$m nj
of debt over equity as the issue of debt signals boVr h¡ ³¶m|{H$ S>oãQ²>g H$m Bí¶y ~moS>© Ho$ AmË‘{dídmg H$mo
the board's confidence that an investment is
àX{e©V H$aVm h¡ {H$ EH$ {Zdoe bm^Xm¶H$ h¡ VWm dV©‘mZ
profitable and that the current stock price is ñQ>m°H$ ‘yë¶ H$‘ bJm¶m J¶m h¡ (¶{X ñQ>m°H$ H$m ‘yë¶
undervalued (were stock price over valued, the A{YH$ bJm¶m J¶m Wm Vmo B{³dQ>r Omar H$aZo H$m nj {b¶m
issue of equity would be favoured). The issue of Om¶oJm)& B{³dQ>r Omar H$aZm ~moS>© Ho$ AmË‘{dídmg H$s
equity would signal a lack of confidence in the
board and that they feel the share price is over H$‘r H$m g§Ho$V H$aoJm VWm do AZw^d H$aVo h¢ {H$ eo¶a H$m
‘yë¶ A{YH$ bJm¶m J¶m h¡& B{³dQ>r H$m EH$ Bí¶y eo¶a Ho$
valued. An issue of equity would therefore lead
to a drop in share price. This does not however ‘yë¶ ‘| {JamdQ> H$m H$maU hmoJm& ¶Ú{n ¶h hmB©-Q>oH$
apply to high-tech industries where the issue B§S>ñQ´>rO na bmJy Zht hmoVm h¡ Ohm§ B{³dQ>r H$m Bí¶y S>oãQ>
of equity is preferable due to the high cost of Bí¶y H$s D§$Mr bmJV Ho$ H$maU ng§X {H$¶m OmVm h¡ ³¶m|{H$
debt issue as assets are intangible. AgoQ²>g BZQ>¢{O~b h¢&