To explore the relation between reputation and financial contracting, this paper examines the contracting structure in a novel dataset of 227 private equity buyouts of U.S. targets from 2004-2010. We note several provisions which allowed bidders to terminate contracts during the 2007-2008 financial crisis and show how contract structure is related to ex post litigation settlements. Consistent with economic theory, private equity firms were more likely to engage in contract nonperformance when

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... fault penalties were lower. Using details of target valuation changes and contract default penalties, we estimate the gains from backing out of these contracts. These gains approximate the values that bidders place on their reputations, which range from 5% to 9% of the sponsors' fund sizes, or $180 million to $2.5 billion in nominal dollars. We also document the reputational damage resulting from this wave of terminations and find that default penalties are about 115% higher in 2009-2010 than during the pre-financial crisis period. Ultimately, the results demonstrate that in even the most complex transactions subject to financial contracting, reputation and collective group behavior play an essential role in the negotiating process.