The pecking order basically states that companies prefer internal financing over external financing just as debt opposes equity if external financing is to be used. The last resort for companies is to raise equity capital. Steward. C. Myers was the first to popularize pecking order theory when he argued that equity is less preferable when raising capital. The theory states that firms 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 benefit and as a result investors only undervalue their capital. The first assumption of capital structure began with Modigliani and Miller's (1958) proposition about the irrelevance of capital structure. Research, however, has shown Modigliani and Miller's theory to be incorrect in a wide variety of circumstances. Modigliani and Miller's proposal included unrealistic ways of how companies finance their operations, yet specified reasons why financing may be important. One of Modigliani and Miller's unrealistic propositions that will help in this review was that "firms and individuals have the same information." Myers and Majluf improved on this theorem of Modigliani and Miller by suggesting that firms and investors are not equal and that firms possess more information than investors about the firm's true value and firm growth. Myers and Majluf (1984) developed a model in which capital structure choices are made to limit inefficiencies caused by information asymmetries. Asymmetric information occurs when a company's managers know best about the company's value and its growth opportunities are opposed to outsiders. Myers and Maj... half of the paper... and issue shares, which disproves the pecking order theory. There has been some controversy as to why small, high-growth companies fail to follow pecking order theory. One reason could be because they have less internal funds, as they are more likely to be financially constrained. Studies suggest that the pecking order will provide a better description regarding financial behavior when dealing with unconstrained firms. These companies will choose to issue debt unless the stock market is more favorable and the cost of issuing stock is lower than that of issuing debt. 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 financially unconstrained firms are more likely to follow the pecking order while constrained firms are not as likely to follow it...