Debt capacity of tangible assets: What is collateralizable in the debt market?

Starting with Titman and Wessels (1988), capital structure studies have consistently controlled for the effect of an aggregate measure of tangible assets, including land, building, machinery & equipment, capital leases, and plant & equipment in progress, on leverage. They usually report a positive relation between this aggregate measure of tangibility and leverage. We find that this positive link subsists however mainly for "hard" tangible assets, namely land and building, after any specific source of endogeneity is carefully addressed, which is consistent with the view that tangible assets differ in terms of redeployability, contractibility and speed of depreciation. Consistent with our theoretical predictions, we report that "hard" tangible assets and leverage are directly linked only for credit constrained firms, while tangibility and leverage are separate decisions for credit unconstrained firms.