New blood brings change: Exploring the link between rookie independent directors and corporate cash holdings

Abstract

This study examines the relationship between rookie independent directors (RIDs) and corporate cash holdings, using a sample of Chinese A-share firms listed on the Shenzhen and Shanghai stock exchanges from 2006 to 2020. We further investigate the moderating effect of economic policy uncertainty on this association. Our results reveal that the presence of rookie independent directors is positively and significantly related to corporate cash holdings, and that economic policy uncertainty amplifies this relationship. Importantly, we also demonstrate that firms with rookie independent directors exhibit improved operating performance when making cash holding decisions in the Chinese context. The study also finds that firms with greater growth opportunities tend to prefer RIDs, who bring new perspectives essential for leveraging these opportunities, leading to enhanced cash holdings. To ensure the robustness of our findings, we employ a variety of advanced econometric techniques, including alternative proxies, tests for reverse causality, two-stage least squares, propensity score matching, and entropy balancing. Based on our results, we recommend that shareholders in China carefully consider the role of RIDs in their governance structure, as they effectively monitor firm management and contribute to the protection of shareholder interests.