Strategic Financing Decisions: External Vs Internal Sources
Abstract
The ability of a firm to meet its strategic objectives of value maximization is crucial for it to survive in a dynamic environment full of competition and volatile markets. Financing plays a key role in ensuring that a firm at any point in time has enough financial resources to fund its investments and general operations. With the question of financing, firms are faced with the decision to determine the most appropriate source of finance between internal and external financing. Due to cost implications, the pecking order theory advocates for firms to use internal funds before going for external finances. The purpose of this paper is to review the literature on external and internal finances from the demand side to determine the reasons as to why firms chose either source of finance or both and to check the validity of the pecking order theory. The