Non-Financial Liabilities and Effective Corporate Restructuring

Abstract

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