Section 365 of the Bankruptcy Code prohibits enforcement of the once common 'ipso facto clause.' The clause excuses the solvent party from performance of the contract when the other party becomes insolvent. We show that the ability of insolvent firms to continue bad projects is enhanced by the...

In most of the contract theory literature, contracting costs are assumed either to be high enough to preclude certain forms of contracting or low enough to permit any contract to be written. Similarly researchers usually treat renegotiation as either costless or prohibitively costly. This...

The standard contract that governs friendly mergers contains material adverse change (MAC) and material adverse effect (MAE) clauses; these clauses permit a buyer to costlessly cancel the deal if such a change or effect occurs. In recent years, the application of the traditional standard-like...

Creditors and the insolvent firm are required to use the state-supplied bankruptcy procedure if they cannot agree on a private resolution after financial distress has occurred. While these ex post workouts are legal, parties cannot agree in the lending contracts to use a bankruptcy procedure...