"Corporate Financing and Investment Decisions When Firms have Information that Investors Do not have: A critique."

This is a critique write up on A famous paper "CORPORATE FINANCING AND INVESTMENT DECISIONS WHEN FIRMS HAVE INFORMATION THAT INVESTORS DO NOT HAVE" by Myers & Majluf (1984). This write-up investigates their motivation, research methodology, and policy implication in details. I. Introduction. Does capital structure matter? The proposition of the famous MM's argued that the firm's value is determined solely by its real assets, not by the securities it issues. Therefore, the capital structure …

…opportunities. An implication of this theory is as follows: 1) To avoid the underinvestment problem, firms prefer to use internal funds first. When internal funds are insufficient, firms will turn to risk-free debt, then risky debt, and finally equity. This creates financial hierarchy rigidity and hence the name pecking order. 2) Asymmetric information could possibly be the source of financing costs. This opposes the convention that financing cost arose only from administrative and underwriting costs. in details.