This article examines the methodological foundations of exploratory factor analysis (EFA) and suggests that it is properly construed as a method for generating explanatory theories. In the first half of the article it is argued that EFA should be understood as an abductive method of theory generation that exploits an important precept of scientific inference known as the principle of the common cause. This characterization of the inferential nature of EFA coheres well with its interpretation as a latent variable method. The second half of the article outlines a broad theory of scientific method in which abductive reasoning figures prominently. It then discusses a number of methodological features of EFA in the light of that method. Specifically, it is argued that EFA helps researchers generate theories with genuine explanatory merit; that factor indeterminacy is a methodological challenge for both EFA and confirmatory factor analysis, but that the challenge can be satisfactorily met in each case; and, that EFA, as a useful method of theory generation, can be profitably employed in tandem with confirmatory factor analysis and other methods of theory evaluation.