Considering conflicts between shareholders and managers, we revisit the external pecking order of corporate financing under conditions of information asymmetry. With the possibility that debt financing may lead a firm to bankruptcy, we find first that the external pecking order could be reversed. Second, pooling equilibria also exist in our model in two forms: debt issuance and equity issuance. Our results modify pecking-order theory and explain some empirical findings of Jung et al. (Journal of Financial Economics, Vol. 42 (1996), pp. 159–185).
