The pecking order basically states that companies prefer internal financing over external financing as well as debt over equity if external financing must be used. The last resort for companies is to raise equity capital. Steward. C. Myers was the first to popularize the pecking order theory when he argued that stocks are less preferred when raising capital. The theory states that companies will choose internal financing when they can and will choose debt over equity when internal financing is not an option and external financing must be used. Managers overvalue companies to profit, and as a result, investors place a lower value on their equity. The first hypothesis about capital structure began with Modigliani and Miller's (1958) proposition that capital structure was irrelevant. Research has shown, however, that Modigliani and Miller's theory is incorrect in a wide variety of circumstances. Modigliani and Miller's proposal included unrealistic ways for how companies finance their operations. However, it specifies the reasons why funding may be important. One of Modigliani and Miller's unrealistic proposals that would facilitate this study was that "companies and individuals have the same information." Myers and Majluf improved on this theorem of Modigliani and Miller by suggesting that firms and investors are unequal and that firms possess more information than investors regarding the true value of the firm and the growth of the firm. Myers and Majluf (1984) developed a model in which capital structure choices are made to limit inefficiencies caused by information asymmetry. Asymmetric information occurs when a company's managers know more about the company's value and growth opportunities than outsiders do. Myers and Maj...... in the middle of the document ...... and to issue actions, which refutes the pecking order theory. There have been disputes as to why small and high-growth companies fail to follow pecking order theory. . One reason could be that they have less internal funds, as they are more likely to be financially constrained. Studies suggest that pecking order will provide a better description of companies' financial behavior without constraints. These companies will choose to issue debt securities unless the equity market is more favorable and the cost of issuing securities is lower than the cost of issuing debt securities. On the other hand, constrained firms will choose equity over debt unless they can access the debt market. Lemmon and Zender found in their studies that companies without financial constraints are more likely to follow the pecking order, while constrained companies are not as likely to follow it..