Amendment Thresholds and Voting Rules in Debt Contracts
JUDSON CASKEY, KANYUAN HUANG, DANIEL SAAVEDRA
Journal of Accounting Research · 2026 · Volume 64 · Issue 1
Abstract
Most loan contracts in the United States contain a provision for lender voting rules. We study the optimal voting rule that allows lenders to waive a covenant violation. When lenders have heterogeneous preferences, lenient voting rules increase the probability of waivers that allow inefficient investments. Stringent voting rules tend to allocate the marginal vote to lenders who deny waivers after false alarms so that they can renegotiate the loan to extract value from the firm, which incurs deadweight costs. In equilibrium, the optimal voting rule balances these two forces to improve contracting efficiency. We derive and empirically test comparative statics on how the optimal voting rule varies with lenders’ preferences and the borrower's accounting properties. Our model offers a rationale for the prevalent use of voting rule clauses in syndicated loan contracts.
Keywords
amendment thresholds, voting rules, covenant waivers, agency problems, bank loans, renegotiation
Enable JavaScript for citation tools and additional paper interactions.