[4]) Other more practical consderations include the fact that issue costs are least for internal funds, low for debt and highest for equity.
[5] In general, internally generated cash flow may exceed required capital expenditures, and at other times will fall short.
When profit or cashflow falls short, rather than relying on external financing, the firm first draws down its cash balance or sells its marketable securities.
Tests of the pecking order theory have not been able to show that it is of first-order importance in determining a firm's capital structure.
Frank and Goyal show, among other things, that pecking order theory fails where it should hold, namely for small firms where information asymmetry is presumably an important problem.