Non-Financial Liabilities and Effective Corporate Restructuring

Bo Becker, Jens Josephson and Hongyi Xu

No 20735, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Non-financial obligations created by long-term contracts such as leases are often large, exceeding financial debts in around a third of US firms. Their treatment in insolvency varies: Chapter 11 allows firms to freely reject or assume contracts, but many other restructuring regimes do not allow rejection. We model regimes with and without the rejection option. This option prevents excessive liquidation of insolvent firms and increases firms’ debt capacity. Using novel measures of executory contracts by industry, and two difference-in-difference settings, we confirm that leverage and loan flow increase when the rejection option is available.

Keywords: Restructuring (search for similar items in EconPapers)
JEL-codes: G21 G32 G33 (search for similar items in EconPapers)
Date: 2025-10
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