According to (Myers &Majluf, 1984) firms may find it profitable to sellsecured debt because there are some costs that are linked with issuing thesecurities, about which the firm’s managers have more appropriate informationthan the outsider shareholders.
Because of this, by issuing the debt securedthrough the property with known figures cancels these expenses and costs. Thesetypes of findings and information suggests that there is a positiverelationship between the tangibility of a firm with its leverage because firmsthat hold more assets will tender its assets more to lenders as the collateralsand will try to issue more debts so that they will take advantage of this opportunity.Another information to be noted from the pioneering paper of (Jensen , 1976) & Myers (1977) suggested thatshareholders from highly leveraged firms encourages to invest minimally to disposewealth from the debt holders of firm. But at the same time, the debt holderscan restrict these opportunistic behaviors in order to force to them to presenttheir tangible assets as the collaterals before the issuance of loans, but nosuch restriction is possible for the projects that are impossible to becollateralized.
With the help of these incentives, a positive relationship ismade and induced between the leverage of the firm and its capacity tocollateralize its debt. There are lots of empirical studies that are reportedand concludes a positive relationship between the leverage and tangibility of afirm.However if we note that if managershave tendency to consume more than high levels of bonuses, can result in anegative correlation between the leverage and its collateralizable assets (Titman , 1988). A firm having a lesscollateralizable assets or tangibility may prefer high levels of the debt tostop the managers from using high levels of perquisites. According to thisagency explanation, there is a negative relationship between the leverage andtangibility.