Working Paper Series,
Research Institute of Industrial Economics

Abstract: Many insolvency systems focus on restructuring financial liabilities, and ignore operational liabilities such as leases and long-termsupplier contracts. We model the U.S. option to reject such contracts and find that it avoids excessive liquidation of firms with significant non-financial obligations and increases debt capacity ex ante. Using text analysis and accounting data to measure the extent of executory contracts, we test the debt capacity hypothesis using difference-in-difference tests comparing the U.S. to countries where rejection is limited and the introduction of rejection in Israel in 2019. We find operating restructuring is a key aspect of insolvency with a large impact on corporate capital structures.

Keywords: Bankruptcy; Restructuring; Executory contracts

JEL-codes: G32; G33

Language: English

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

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