Should Insolvency Law Cover Non-Financial Obligations? Contract Rejection and Debt Capacity

Bo Becker, Jens Josephson and Hongyi Xu
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Hongyi Xu: Stockholm School of Economics

No 1477, Working Paper Series from Research Institute of Industrial Economics

Abstract: Non-financial obligations created by long-term contracts, such as leases, are often large, exceeding financial debts in a quarter of U.S. 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 three difference-in-difference settings, we confirm that leverage and loan flow increase when the rejection option is available.

Keywords: Bankruptcy; Restructuring; Executory contracts (search for similar items in EconPapers)
JEL-codes: G32 G33 G34 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2023-10-30, Revised 2026-10-04
New Economics Papers: this item is included in nep-cfn and nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:1477

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