Rookie Independent Directors and Corporate Policies: Evidence from China

In this study, we investigate how corporate policies are influenced by the presence of rookie independent directors (RIDs). We hypothesize that RIDs, due to their inexperience, impact corporate policies in ways that may amplify agency problems. Specifically, firms with RIDs demonstrate higher investment in R&D and capital expenditure, increased leverage (both short- and long-term), enhanced liquidity (cash holdings and working capital), and elevated risk-taking, while their presence leads to a conservative payout policy. Using a sample of Chinese-listed firms from 2008 to 2022, our findings confirm these predictions. Additional analyses reveal that RIDs’ effects are more pronounced in high-CEO-power environments, where their limited governance capabilities may align with managerial interests, exacerbating financial risks. This study contributes to the corporate governance literature by integrating upper echelon and agency theories, shedding light on the dual-edged role of RIDs in shaping corporate outcomes.