Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1477: Should Insolvency Law Cover Non-Financial Obligations? Contract Rejection and Debt Capacity

Bo Becker (), Jens Josephson () and Hongyi Xu
Additional contact information
Bo Becker: Stockholm School of Economics, Postal: CEPR and ECGI
Jens Josephson: Stockholm University, Postal: and Research Institute of Industrial Economics (IFN), Stockholm, Sweden
Hongyi Xu: Stockholm School of 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

JEL-codes: G32; G33; G34

Language: English

57 pages, First version: October 30, 2023. Revised: October 4, 2026. Earlier revisions: January 11, 2024, November 28, 2024.

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