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Research article
Rookie independent directors and agency costs: Evidence from
Chinese listed rms
Waqas Bin Khidmat
a,b
, Nadia Ashraf
a
, Sook Fern Yeo
b,c,*
, Cheng Ling Tan
d,e
,
Muhammad Noman Shaque
b,f
a
Department of Business Administration, Air University Islamabad, Aerospace and Aviation Campus, Kamra, Attock, Pakistan
b
Faculty of Business, Multimedia University, Malaysia
c
Department of Business Administration, Daffodil International University, Dhaka, Bangladesh
d
Graduate School of Business, Universiti Sains Malaysia, Malaysia
e
Department of Information Technology and Management, Daffodil International University, Dhaka, Bangladesh
f
CESAM—Centre for Environmental and Marine Studies, Department of Environment and Planning, University of Aveiro, 3810-193 Aveiro, Portugal
ARTICLE INFO
Keywords:
Rookie independent directors
Agency Costs
Gender diversity
Qualied nancial Institutions
China
ABSTRACT
This study investigates the impact of rookie independent directors (RIDs) on agency costs. Uti-
lizing a sample of Chinese listed rms, we employ panel ordinary least square estimations. Our
ndings reveal that increased RIDs is positively associated with agency costs, suggesting that
rookie independent directors may exacerbate agency conicts within Chinese rms. Also, qual-
ied nancial institutional investors and gender diversity within the board composition mitigate
the positive effect of RIDs on agency costs. Overall, our study contributes to understanding
corporate governance dynamics in Chinese listed rms by shedding light on the nuanced rela-
tionship between rookie independent directors and agency costs.
1. Introduction
In the dynamic landscape of corporate governance, the role of independent directors has been the subject of extensive research,
particularly in emerging markets such as China. Independent directors are traditionally viewed as essential guardians of shareholders’
interests, tasked with monitoring management and controlling shareholders to mitigate agency issues [1–4]. However, within the
realm of independent directors, a specic group that has garnered attention in recent studies is the cohort of rookie independent
directors (RIDs), dened as those with less than three years of boardroom experience [5,6]. This research explores the relationship
between RIDs and agency costs within the context of Chinese-listed rms. Agency costs, rooted in agency theory, arise from conicting
goals between management (agents) and investors (owners) [7]. It is imperative to understand how the presence of RIDs, with their
limited board expertise, impacts agency costs, as these costs can have a profound effect on a company’s performance and valuation [8,
9]. This study seeks to contribute to the existing literature in three crucial aspects. First, it extends the understanding of the monitoring
role of RIDs by focusing on their relationship with agency costs. While previous studies have explored the impact of RIDs on rm
performance [6], however, examining their inuence on management opportunism and, consequently, agency costs remains under-
explored. By investigating the connection between RIDs and agency costs, this research aims to ll this gap and offer insights into the
* Corresponding author. Faculty of Business, Multimedia University, Malaysia.
E-mail addresses: waqasbinkhidmat@yahoo.com (W. Bin Khidmat), Nadia.ashraf@aack.au.edu.pk (N. Ashraf), yeo.sook.fern@mmu.edu.my
(S.F. Yeo), tanchengling@usm.my (C.L. Tan), shaque@ua.pt (M.N. Shaque).
Contents lists available at ScienceDirect
Heliyon
journal homepage: www.cell.com/heliyon
https://doi.org/10.1016/j.heliyon.2024.e39366
Received 3 March 2024; Received in revised form 11 October 2024; Accepted 12 October 2024
Heliyon 10 (2024) e39366
Available online 12 October 2024
2405-8440/© 2024 Published by Elsevier Ltd. This is an open access article under the CC BY-NC-ND license
( http://creativecommons.org/licenses/by-nc-nd/4.0/ ).
broader implications for corporate governance.
Second, the existing body of literature presents a multifaceted perspective on the impact of RIDs. Some studies suggest that RIDs
positively contribute to rm performance, attributing their effectiveness to the monitoring function of controlling shareholders [6]. On
the contrary, recent research, exemplied by Chen and Zhang (2022) [5] raises concerns about the potential inefciency of RIDs in
fullling their monitoring role. This divergence in ndings underscores the complexity surrounding the contribution of RIDs to
corporate governance, prompting a need for further exploration into their effects on agency costs, particularly in the context of the
Chinese listed rms. The signicance of investigating the role of RIDs in the Chinese corporate landscape lies in its unique charac-
teristics. As the second-largest economy and the largest developing country, China presents a distinctive setting where corporate
governance practices are evolving rapidly. The constrained tenure of directors and the scarcity of seasoned independent directors
accentuate the prominence of RIDs in the governance structure. Notably, over 25 % of independent directors in China fall into the
rookie category, and over 15 % of rms boast a composition with over 60 % RIDs from 2008 to 2014 [6].
Third, the study advances our knowledge by investigating the moderating effects of external factors such as Qualied Foreign
Institutional Investors (QFIIs) and Gender Diversity (GD) on the relationship between RIDs and agency costs. The study highlights the
importance of considering contextual factors in corporate governance research by uncovering how these factors inuence the link
between board composition and agency costs. The remainder of the article is organized as follows: Section 2describes the literature
review while the data collection procedure and methodology are described in Section 3. This is followed by Section 4which provides a
brief discussion of the data analysis and Section 5concludes the entire study.
2. Literature review
2.1. Theoretical background
2.1.1. Agency theory perspective
Agency Theory, as conceptualized by Jensen and Meckling (1976) [7], provides a foundational framework for understanding the
principal-agent relationship within organizations. In situations where conicts of interest emerge between managers (agents) and
shareholders (principals), appointing independent directors is considered a mechanism to align interests and reduce agency costs. The
emergence of RIDs introduces a novel dimension to the traditional Agency Theory narrative. In the context of China, where the
prevalence of RIDs is driven by tenure restrictions and a shortage of experienced independent directors, agency theory suggests a
unique contribution of RIDs to governance mechanisms. Kang et al. (2016) [10] and Chen and Keefe (2020) [6] content that RIDs
positively impact rm performance, attributing this effect to their monitoring function on controlling shareholders. Despite their lack
of extensive board experience, RIDs may offer a fresh perspective and a heightened sense of accountability. In this context, Agency
Theory extends beyond the conventional wisdom of tenure and experience, acknowledging the potential positive inuence of RIDs in
the monitoring landscape.
2.1.2. Resource dependence theory perspective
Resource Dependence Theory (RDT), pioneered by Pfeffer and Salancik (1978) [11] shifts the focus to how organizations depend on
external resources for survival and growth. Within corporate governance, boards play a central role in managing these external de-
pendencies. RDT posits that effective governance structures are crucial for navigating and leveraging external resources.
In the context of RIDs, their external status, with limited board experience, can be seen as an asset from a resource-dependence
perspective. The diversity they bring regarding professional backgrounds and expertise may enhance the board’s capability to
manage external challenges and dependencies. RIDs, as external actors, can potentially expand the organization’s resource networks,
reducing reliance on a limited set of external entities. By integrating RIDs into the board composition, organizations may strategically
diversify their resource dependencies, thereby increasing resilience and adaptability. In this context, RDT views RIDs not only as
monitors of internal operations but also as strategic assets contributing to the organization’s capacity to secure critical external
resources.
2.2. Hypothesis Development
Corporate governance is a dynamic eld that continually evolves to address the challenges of aligning managerial actions with
shareholder interests. A critical aspect of this governance landscape is the role of independent directors, who act as a bridge between
shareholders and management. This literature review explores the intricate relationship between RIDs and agency costs, examining the
scenario through RDT and Agency Theory lenses. By synthesising insights from these theories, we aim to unravel the multifaceted
impact of RIDs on corporate governance, agency costs, and resource dependencies.
2.2.1. Rookie independent directors and agency Cost
The literature has highlighted the potential benets of having RIDs, emphasizing their dedication to building a reputation as
competent directors and their commitment to efcient corporate decision-making [6]. However, the career concern model posits that
rookie directors may be more prone to management capture, ultimately diminishing their effectiveness as regulatory agents [12,13].
This creates tension between RIDs’potential positive contributions and the risks associated with their lack of experience.
Furthermore, the reputation incentive model underscores the importance of reputation as a disciplinary force for directors [14],
introducing a dichotomy in the motivations of independent directors. While some argue that reputation encourages directors to be
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
2
self-disciplined [15], others propose the existence of a "reputation-liquidation" effect, wherein directors pursue short-term gains when
the value of their reputation is low [5]. Given their lower initial reputation value, this model raises critical questions about the
effectiveness of the reputation incentive mechanism for RIDs.
In recent years, the inux of rookie independent directors into the directorial labor market has signicantly inuenced the dy-
namics of corporate boards. Despite their growing importance, there has been limited exploration into the impact of these rst-time
directors on corporate policies and board functionality. Recognizing the essential role of independent directors in mitigating agency
conicts involving managerial ownership and controlling shareholders, prior studies have emphasized the signicance of board
experience in their monitoring function [16–18].
A specic subset of the corporate governance literature has shed light on rookie independent directors, dened as those with less
than three years of experience in directorial roles. Rookie Independent Directors (RIDs) have less than three years of board experience.
The role of RIDs in corporate governance has gained considerable attention in recent years, particularly in emerging markets like
China. The inclusion of RIDs on boards is often driven by regulatory requirements and the need to inject fresh perspectives into
corporate governance. However, their lack of experience raises concerns about their effectiveness in overseeing management and
mitigating agency conicts. Chen et al. (2022) [5] emphasize that RIDs might not possess the necessary expertise and experience to
monitor management, potentially leading to increased agency costs effectively. This aligns with the traditional agency theory, which
suggests that effective monitoring by independent directors is crucial for reducing agency costs. Without sufcient experience, RIDs
may fail to challenge management decisions, leading to higher costs associated with managerial opportunism.
On the other hand, some studies suggest that RIDs can bring valuable new perspectives and energy to the board. Kang et al. (2016)
[10] argue that RIDs may enhance rm performance by bringing innovative ideas and questioning established practices. This
perspective is supported by the resource dependence theory, which views board diversity as a means to acquire essential resources and
capabilities [11]. Despite these potential benets, the balance of evidence points towards the challenges RIDs face in performing their
monitoring role effectively.
The mixed ndings in the literature highlight the need for a deeper understanding of the specic circumstances under which RIDs
can mitigate or exacerbate agency costs. For instance, the inuence of rm-specic factors such as corporate governance quality, the
presence of other experienced board members, and the industry context may signicantly affect the impact of RIDs on agency costs.
Notably, recent research by Bai and Yu (2022) [13] and Chen et al. (2022) [5] has revealed a concerning association between rookie
independent directors and increased corporate fraud in China. Their ndings, derived from rm-level datasets, indicate a positive
correlation between the presence of rookie independent directors and instances of corporate fraud, a phenomenon primarily attributed
to management opportunism. As an emerging economy and evolving corporate governance mechanism, we expect rookie independent
directors to have an impact leading o to higher agency costs. Few studies raised concerns about the potential negative consequences
associated with the presence of rookie independent directors, particularly in the context of innovation [19], dividend payouts [20],
corporate social responsibility [21] and stock price crash risk [12]. The unique characteristics of these directors, marked by a lack of
extensive track records, prompt further exploration into the reasons behind their potential ineffectiveness in fullling their monitoring
duties.
In line with this exploration, Li et al. (2021) [22] present an alternative perspective by proposing that companies with uncertied
independent directors exhibit elevated misappropriation and information opacity levels. This results in an increased prevalence of
related-party transactions and other receivables. The proposal indicates a departure from previous research, suggesting that the lack of
a certied track record among independent directors may hinder their ability to perform their duties effectively. Therefore, based on
the evolving discourse in the literature, we propose the following hypothesis.
H1. There is a positive relationship between rookie independent directors and agency costs (selling and administrative expense ratio;
administrative expense ratio, and total asset turnover ratio as inverse proxy)
2.2.2. Rookie independent directors, qualied foreign institutional investors and agency Costs
Foreign institutional investors have emerged as key stakeholders inuencing corporate dynamics, particularly in the context of
increased foreign investment. Foreign investors bring positive monitoring impacts on companies, acting as catalysts for implementing
governance reforms [23,24]. Their role becomes particularly crucial in developing nations where local investors may lack the expe-
rience and regulatory familiarity prevalent in more established markets [25,26].
Foreign institutional investors from developed nations, accustomed to rigorous regulatory regimes, are recognized for their ability
to implement effective governance procedures [27]. Their perceived impartiality and inclination to monitor others instead of operating
exclusively in their self-interest make them valuable contributors to reducing segregated, harmful behaviors within businesses.
Aggarwal et al. (2011) [28] underscore their signicance in enhancing corporate governance, especially in nations lacking robust
shareholder protections. Ferreira and Matos (2008) [29] draw a connection between increased foreign ownership and improved
business performance, suggesting that foreign investors, with fewer economic ties to local entities, are less susceptible to management
and political pressure that could adversely impact business outcomes. In this landscape, the role of QFIIs becomes crucial, with Huang
and Zhu (2015) [27] emphasizing their substantial inuence on the controlling state shareholders of companies in comparison to
regional mutual funds.
As foreign investors continue to shape China’s securities markets, their impact extends beyond direct nancial involvement,
signicantly inuencing domestic corporate governance. Their role in mitigating agency costs and enhancing overall business per-
formance is evident through their contribution to strengthening auditing processes and fostering transparency in domestic enterprises
[30]. QFIIs, in particular, play a distinctive role in inuencing the controlling state shareholders of companies. The heightened
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
3
intelligence brought about by foreign investors, as emphasized by Cheung et al. (2009) [30], has led to stronger information disclosure
requirements, acting as a deterrent against minority shareholder expropriation.
Building on the existing literature, we wish to explore the moderating role of QFIIs on the relationship between rookie independent
directors and agency costs.
H2. QFIIs reduce the positive impact of rookie independent directors on agency costs (selling and administrative expense ratio;
administrative expense ratio, and total asset turnover ratio as inverse proxy).
2.2.3. Rookie independent directors, gender diversity, and agency Costs
Gender diversity on corporate boards is increasingly recognized as a critical factor inuencing organizational governance and,
subsequently, agency costs. The seminal work of Fama and Jensen (1983) [31] underscores the primary responsibility of corporate
governance in addressing agency conicts arising from the misalignment of interests between insiders and external shareholders. In
this context, gender diversity emerges as a mechanism to control agency conicts, leveraging the unique attributes of female directors.
Gender diversity contributes to effective corporate governance through timely decision-making, strategic planning control, and
quality nancial reporting by female directors [32,33]. Adams and Ferreira (2009) [32] specically conclude that gender diversity
results in better monitoring, as women directors tend to ask more questions and are less likely to compromise shareholders’interests,
thereby lowering agency conicts. The diversity in perspectives offered by a gender-diverse board increases the monitoring interests of
shareholders [34]. Carter et al. (2003) [35] empirically support the inverse relationship between female board membership and
agency costs. Their ndings suggest that increased gender diversity enhances managerial supervision and control, as female directors
bring unique perspectives that male directors might not possess. This increased vigilance and questioning by female directors can
contribute to a more robust governance structure, reducing the likelihood of agency problems [36].
We propose that board gender diversity mitigates the negative effect of rookie independent directors on agency costs. Our prop-
osition is based on the following points. First, female directors are often associated with enhanced communication and collaboration
skills. The literature suggests that women tend to be more inclusive in decision-making processes, encouraging diverse viewpoints and
fostering an environment where rookie independent directors will feel comfortable expressing their opinions [32,34]. This inclusive
decision-making culture can empower rookie independent directors to actively participate in board discussions, contributing their
insights and expertise. Second, the literature emphasizes that a variety of cognitive approaches to problem-solving and strategic
planning characterize gender-diverse boards [33]. Female directors may bring different experiences and perspectives, challenging
conventional thinking and offering fresh insights. For rookie independent directors, exposure to diverse decision-making styles can be
enriching and provide a broader understanding of governance issues and strategic considerations.
In the context of China, where corporate governance practices may still be evolving, the presence of female directors can act as a
catalyst for positive change. By fostering a collaborative and inclusive decision-making culture [37], providing diverse perspectives
[38], encouraging prudent risk assessment [39], and emphasizing ethical considerations [40], female board members can signicantly
enhance the decision-making capabilities of rookie independent directors. This collaborative dynamic contributes to effective
governance, aligning rookie directors’actions with the organization’s and its stakeholders’long-term interests. Therefore, our next
hypothesis is as follows.
H3. Gender diversity on the board reduces the positive impact of rookie independent directors on agency costs (selling and
administrative expense ratio; administrative expense ratio, and total asset turnover ratio as inverse proxy).
3. Methodology
3.1. Data and sample
The data about rookie independent directors, agency costs, and other control variables are extracted from the Chinese stock market
and accounting research database (CSMAR). The studies cover annual data from 2009 to 2020. 2008 was taken as the base year as most
of the corporate governance variables data have been available since then. Also, the new accounting standards have been introduced
since 2008. However, due to the replication of data in 2009 of RIDs, for this study, 2010 was taken as the base year. The sample initially
consisted of all the companies listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE). From this sample,
companies in the nancial and public utility sectors were excluded. The decision to exclude specic sectors and companies from the
data sample is due to their unique characteristics that may introduce confounding factors or distort the analysis. Specically, nancial
and public utility sectors are excluded due to their distinct regulatory frameworks and operational dynamics [41]. Additionally,
companies that solely issued B-shares were excluded in order to maintain homogeneity within the sample and ensure comparability
across rms [42]. The nal sample represents 2963 rms with 28600 rm-year observations.
3.2. Measurement of variables
The dependent variables in this study encompass three dimensions of agency costs [1,41]. The rst proxies of agency cost measured
by the selling and administrative expense ratio (S&AdmExp ratio) are the sum of selling and administrative expenses scaled by revenues. They
offer a holistic measure of overall agency costs, incorporating operational and administrative facets. Second, we focus on adminis-
trative expenses, denoted by the administrative expense ratio representing the proportion of these costs concerning revenues. Lastly, the
third measure of agency costs, denoted by the Assets turnover ratio, explores the efciency of asset utilization by examining revenues
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
4
scaled by total assets (An inverse proxy of agency cost) [43].
Moving to the independent variables, the rookie independent directors ratio (RIDs%) captures the ratio of independent rookie
directors to the total number of independent directors on the board [5,13]. This variable quanties rookie independent directors’
prevalence in the composition of board independence. Accompanying this, the rookie independent director’s natural logarithm
(Ln-RIDs) represents the natural logarithm of one plus the count of rookie independent directors [5].
Considering moderating variables, QFIIs are operationalized as a dummy variable, taking the value of 1 if a rm has at least one
QFIIs and 0 otherwise [44]. This variable is crucial for assessing the potential moderating impact of foreign institutional investors on
the relationship between rookie independent directors and agency costs. Similarly, GD represents the ratio of female directors to the
total number of directors on the board, offering a metric for evaluating the inuence of gender diversity on agency costs [41].
Controlled variables included in the model encompass various aspects of corporate governance and rm characteristics. These
include Board Size (BS), Board Independence (BI), CEO Duality (CEOD), CEO Tenure (CEOT), Leverage (Lev), State Ownership (SO),
Growth of Firm (Growth), Tobin’s Q (TQ), and Firm Age (FA). An increased Board Size is argued to enhance corporate governance by
providing diverse perspectives and expertise [45]. Higher Board Independence is associated with better monitoring capabilities and
reduced agency costs. Research suggests that independent directors can act as effective overseers, ensuring alignment with share-
holders’interests and mitigating conicts of interest [46]. CEO Duality, where the CEO also serves as Chairman, may lead to a lack of
check and balance, potentially increasing agency costs [47]. Longer CEO Tenure might signify experience and stability, reducing
agency costs [48].
Leverage, or the use of debt, is argued to inuence agency costs. Debt can discipline management by aligning interests with
creditors [49]. State Ownership may impact agency costs differently. While it could enhance monitoring due to governmental over-
sight, it might also introduce political motivations, potentially increasing agency costs [50]. The Growth of the Firm is often associated
with increased agency costs. Rapid growth may necessitate additional monitoring and control mechanisms, potentially leading to
higher costs [51]. A higher Q ratio may indicate efcient investment, reducing agency costs, while a lower ratio might suggest in-
efciency and potential agency issues [8]. Firm Age can inuence agency costs, with younger rms potentially facing higher costs due
to uncertainties and a lack of established governance structures. Older rms may benet from experience and stable governance,
potentially reducing agency costs [52].
Table 1 outlines all variable specications, providing a comprehensive overview of each variable’s denitions and roles within the
empirical model.
3.3. Empirical model
In the context of this study, the Ordinary Least Squares (OLS) method is widely employed in the literature to examine the inuence
of rookie independent directors on agency costs [12]. The empirical model, representing the baseline analysis, includes the following
independent variables as shown in equation [1]:
Table 1
Variables measurement.
Variables Symbol Denition
Dependent Variable
S&AdmExp
ratio
The sum of selling expenses and administrative expenses, scaled by revenues.
AdmExp ratio Total Administrative expenses scaled by revenues
TATO ratio Revenues scaled by total assets
Independent Variables
Rookie Independent directors ratio RIDs% The ratio of rookie independent directors out of total independent directors.
Rookie Independent directors log Ln-RIDs natural logarithm of one plus the amount of rookie independent directors.
Rookie Independent directors higher
presence
RIDs-CM If the percentage of rookie independent directors is more than 50 %, the variable takes the value
of one.
Moderating Variables
Foreign Qualied Institutional Investors QFIIs a dummy variable that takes the value of 1 if a rm has at least one QFIIs, zero otherwise.
Gender Diversity GD The ratio of female directors on board to total directors on board of a rm.
Controlled Variables
Board Size BS Total number of board of directors of a rm in a year.
Board Independence BI The ratio of independent directors to total directors of a rm.
CEO Duality CEOD A dummy variable takes the value of 1 if the CEO of the rm is also Chairman, and zero
otherwise.
CEO Tenure CEOT Number of years the CEO is serving in a rm.
Leverage Lev Total debt scaled by total assets
State Ownership SO A dummy variable that takes the value of 1, if the rm is state-owned, zero otherwise
Growth of Firm Growth Change in Sales of the rm
Tobin’s Q TQ Market Value over Total Assets
Firm Age FA The natural logarithm of rm age starts from the time of listing.
Table 1, explains the denitions of variables used in our analysis. All continuous variables are winsorized at the 1st and 99th percentiles.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
5
Agency Costsit =β0+β1RIDit +β2BSit +β3BIit +β4CEODit +β5CEOTit +β6Levit +β7SOit +β8Growthit +β9TQit +β10FAit +ϵo
[1]
In the above equation above by Ain et al. (2020), we anticipate a positive relationship between rookie independent directors and
agency costs (β
1
>0), indicating that an increase in the proportion of rookie directors may lead to higher agency costs. Following Ain
et al.’s (2020) study, CEODi and TQi are also expected to have a positive effect on agency costs, while BSit, BIit, CEOTit, Levit, SOit,
Growthit, and FAit reduce agency costs.
Including interaction terms in the regression equations aims to capture the potential moderating effects of certain variables on the
relationship between RIDs and agency costs. In equation [2] below (Ain et al., 2020), the interaction term RID
it
×QFII
it
is introduced
to examine whether the inuence of RIDs on agency costs is contingent upon the presence of QFIIs. Similarly, in equation [3] by Ain
et al. (2020), the interaction term RID
it
×GD
it
explores how GD moderates the relationship between RIDs and agency costs.
Agency Costsit =β0+β1RIDsit +β2QFIIit +β3(RIDsit ×QFIIit) + β4BIit +β5CEODit +β6CEOTit +β7Levit +β8SOit +β9Growthit
+β10TQit +β11 FAit +β12BSit +ϵo
[2]
Agency Costsit =β0+β1RIDsit +β2QFIIit +β3(RIDit ×GDit) + + β4BIit +β5CEODit +β6CEOTit +β7Levit +β8SOit +β9Growthit
+β10TQit +β11 FAit +β12BSit +ϵo
[3]
In equations (2) and (3), the inclusion of moderators suggests a potential reduction of the inuence of rookie independent directors on
agency costs. We anticipate that the presence of QFIIs, as documented in the literature, may mitigate managerial opportunism, thereby
potentially diminishing agency costs [23,53]. Likewise, existing research indicates that gender diversity on the board correlates with
reduced agency costs. These moderation effects offer valuable insights into how external factors can shape the relationship between
rookie directors and agency costs within corporate governance structures [40,41].
3.3.1. Alternative measurement of agency Costs
The study incorporates alternative measures of dependent and independent variables for a robust check. Similar to Rashid’s(2015)
study [1], agency cost is measured as the ’Tobin’s Q and free cash ow interaction’(QFCF), which assesses the interplay between a
company’s growth prospects and available free cash ows. Growth opportunities are measured using dummy variables indicating
whether a company’s Tobin’s q is below 1 (suggesting poor management) or otherwise. Free cash ows are calculated as operating
income before depreciation minus taxes, interest expense, and dividends paid, standardized by total assets. It is anticipated that rms
with low (high) growth opportunities, given their free cash ows, would exhibit higher (lower) agency costs [43]. Therefore, a higher
value of this agency cost metric denotes increased agency costs.
3.3.2. Alternative measurement of rookie independent directors
The robust analysis also uses an alternative measure of rookie independent directors. Rookie independent director’s critical mass
(RIDs-CM) is introduced as a variable indicating whether the percentage of rookie independent directors exceeds 50 %, providing
insights into a higher presence of such directors on the board [6]. A rookie independent director may not have much say in the
company; however, when they achieve critical mass, they can raise their voice on disputable issues. We expect agency mitigation to
increase when rookie independent directors achieve critical mass.
3.3.3. Alternative estimation techniques
To mitigate endogeneity concerns regarding the link between RIDs and agency costs, we employ instrumental variable (IV) esti-
mations. The necessity arises from the likelihood of endogeneity between RIDs and agency costs, stemming from unobservable factors
inuencing both variables simultaneously [54]. The IV method addresses endogeneity by isolating exogenous variation in the
explanatory variable that is not correlated with the error term in the regression model. The key to the IV approach is nding an
appropriate instrument that meets two conditions: relevance and exogeneity. In this study, the authors used the ratio of rst-year
independent directors within the same region as an instrument for RIDs. This choice is grounded in the methodology of Chen and
Keefe (2020) [6], who demonstrated that regional preferences for independent directors could serve as valid instruments. The rele-
vance condition is met because the regional ratio of rst-year independent directors is likely correlated with the proportion of RIDs in a
rm. Regional trends and practices inuence board compositions across rms in the same area. The exogeneity condition is satised as
this regional ratio is unlikely to be directly related to the specic agency costs of a rm, ensuring that the instrument is uncorrelated
with the error term. By using this instrument, the IV method helps remove bias introduced by unobserved confounders. Simulta-
neously, this will affect both RIDs and agency costs, allowing for a more accurate estimation of the causal impact of RIDs on agency
costs.
The GMM method is particularly effective in addressing endogeneity in panel data, where unobserved individual effects and dy-
namic relationships between variables are common. GMM reduces endogeneity through the use of internal instruments and moment
conditions. Internal instruments involve using lagged values of the explanatory variables, which are assumed to be correlated with the
endogenous variables but uncorrelated with the current error term. For example, past values of rookie independent directors can serve
as instruments for current values, as past board compositions inuence current ones but are less likely to be correlated with current
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
6
agency costs. Moment conditions are expectations that certain combinations of variables and errors should equal zero, ensuring the
validity of the instruments used. By employing lagged variables as instruments, GMM controls for unobserved heterogeneity and
dynamic endogeneity, making it a robust tool for producing reliable estimates. This method is particularly advantageous as it can
handle various forms of endogeneity, providing a powerful means of obtaining consistent parameter estimates.
The xed panel methodology, also known as xed effects regression, is also employed in this study to control for time-invariant
unobserved heterogeneity at the rm level. By including rm-specic xed effects, this methodology allows for the estimation of
the relationship between variables while accounting for individual rm characteristics that remain constant over time. This approach
is particularly useful in addressing endogeneity concerns and mitigating bias that may arise from omitted variables or unobserved
heterogeneity [55]. Additionally, xed panel models are robust against certain forms of omitted variable bias and provide efcient
parameter estimates when there is within-rm variation over time [56]. Lastly, this study also incorporates the Generalized Method of
Moments (GMM). Corporate governance research often involves panel data with observations across multiple periods and rms. GMM
is well-suited for panel data analysis, allowing researchers to control for unobserved heterogeneity and time-invariant factors [57].
4. Results
4.1. Descriptive statistics
Table 2 provides descriptive statistics for the key variables in our study, shedding light on their central tendencies and variations
within the sample of 29,600 observations. All variables underwent winsorization at the 1st percentile at both ends to mitigate the
inuence of outliers.
Starting with the dependent variables, S&AdmExp ratio, representing the sum of selling and administrative expenses scaled by
revenues, has a mean of 0.169, indicating that, on average, these costs constitute 16.9 % of revenues. The administrative expense ratio,
measuring total administrative expenses scaled by revenues, has a mean of 0.11, signifying that administrative expenses alone
represent 11 % of revenues. Assets turnover ratio, reecting revenues scaled by total assets, has a mean of 0.63, showcasing the
revenue generation efciency concerning the asset base.
Moving to the independent variables, RIDs%, indicating the ratio of independent rookie directors to total independent directors,
has a mean of 0.32, suggesting that, on average, almost 32 % of the board consists of independent rookie directors. LN-RIDs, the natural
logarithm of one plus the count of rookie independent directors, has a mean of 0.67. Considering the moderating variables, QFIIs have
a mean of 0.165, indicating that, on average, about 16 % of rms in the sample have at least one QFIIs. GD, representing the ratio of
female directors to the total number of directors, has a mean of 0.145, suggesting that, on average, approximately 14.8 % of board
members are female.
Lastly, the control variables provide additional contextual information. Board Size (BS) has a mean of 8.77, implying that rms, on
average, have around nine directors. Board Independence (BI) with a mean of 0.36 indicates that, on average, 36 % of directors are
independent. CEO Duality (CEOD) has a mean of 0.25, revealing that CEO and Chairman roles are held by the same individual in about
25 % of cases. CEO Tenure (CEOT) has a mean of 2.92, indicating an average CEO tenure of almost three years. Leverage (Lev) has a
Table 2
Descriptive statistics (n =26900).
VARIABLES Mean Standard Deviation Minimum Maximum
Dependent Variables
S&AdmExp ratio 0.169 0.16 0.036 0.969
AdmExp ratio 0.11 0.10 0.006 0.704
TATO ratio 0.63 0.44 0.031 2.64
Independent Variables
RIDs% 0.32 0.40 0 0.82
LN-RIDs 0.67 0.48 0 1.51
Moderating Variables
QFIIs 0.165 0.062 0 27.29
GD 0.148 0.135 0 0.556
Control Variables
Board Size 8.76 1.65 5 18
Ln (Board size) 2.16 0.5 1.61 2.89
Board Independence 0.38 0.05 0 0.82
Ln (Board Independence) 1.021 2.99 0 0.198
CEOD 0.25 0.41 0 1
CEOT 2.92 2.73 0 19.01
Lev 0.44 0.21 0.092 0.96
SO 0.46 0.51 0 1
Growth 0.18 0.42 −0.46 3.05
TQ 2.06 1.92 0.89 12.14
Firm Age 7.47 2.41 2 38
Ln(Firm age) 2.01 0.88 0.72 3.64
This table presents the descriptive statistics of the main variables used in this study. All continuous variables are winsorized at the 1st and 99th
percentile. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
7
mean of 0.44, signifying that, on average, 44 % of a rm’s assets are nanced by debt. State Ownership (SO) with a mean of 0.46
indicates that, on average, 46 % of rms in the sample are state-owned. Growth (Growth), measuring the change in sales, has a mean of
0.18, representing an average growth rate of 18 %. Tobin’s Q (TQ) has a mean of 2.06, suggesting that, on average, the market values a
rm’s assets at more than twice their book value. Lastly, Firm Age (FA) with a mean of 2.01, denotes that rms, on average, have been
in operation for approximately two years since listing.
4.2. Bivariate analysis
Table 3 displays the correlation matrix, offering insights into the relationships among agency costs (S&AdmExp ratio, AdmExp
ratio, and TATO ratio), rookie independent directors, and other relevant variables. The data illustrate that the ratio of independent
rookie directors to total directors (RIDs%) shows a weak positive correlation (0.22) with S&AdmExp ratio, a slight positive correlation
(0.16) with AdmExp ratio, and a moderate negative correlation (−0.36) with TATO ratio. This implies that a higher ratio of inde-
pendent rookie directors may be associated with increased agency costs. Values of VIF (Variance Ination Factor) are provided in the
last column, which helps assess multicollinearity among independent variables. Generally, VIF values below 5 indicate acceptable
levels of multicollinearity [58]. In this table, the highest VIF is 1.50, which is within the acceptable range, indicating that multi-
collinearity is not a signicant concern in the study.
4.3. Multivariate regression analysis
4.3.1. Rookie independent directors and agency costs
Table 4 provides regression results exploring the relationship between rookie independent directors and agency costs across three
dimensions: S&AdmExp ratio, AdmExp ratio (Total Administrative expenses scaled by revenues), and TATO ratio (Revenues scaled by
total assets). Each column in the table corresponds to a different regression model with various independent variables.
In the context of the S&AdmExp ratio, the presence of rookie independent directors (RIDs%) demonstrates a positive and statis-
tically signicant impact (coefcient =0.24, p <0.01). This implies that a higher ratio of independent rookie directors is associated
with an increase in selling and administrative expenses scaled by revenues. Similarly, the natural logarithm of rookie independent
directors (LN-RIDs) also exhibits positive and signicant coefcients, reinforcing the notion that the inclusion of rookie independent
directors enhances the agency cost. The economic signicance of the coefcients shows that for every 1 % increase in the percentage of
rookie independent directors (RID%) on the board, the selling and administrative expense ratio increases by 0.240 %. Similarly, the
coefcient for the natural logarithm of the number of rookie independent directors (LN-RIDs) in the S&AdmExp ratio model is 0.160,
with a t-value of 8.938, indicating strong statistical signicance. This means that a 1 % increase in the number of rookie independent
directors leads to a 0.160 % increase in the selling and administrative expense ratio. Economically, it highlights the potential cost
implications of expanding the number of rookie independent directors on the board.
For the AdmExp ratio, the results follow a similar pattern. RIDs% and LN-RIDs show positive and signicant coefcients, indicating
a positive association between the presence of rookie independent directors and total administrative expenses scaled by revenues. In
the case of the TATO ratio, which involves revenues scaled by total assets, RIDs%, and LN-RIDs exhibit negative and signicant co-
efcients. This suggests that a higher ratio of independent rookie directors may be associated with a decrease in revenues scaled by
total assets. Alternatively, this suggests that a 1 % increase in the proportion of rookie independent directors leads to a 0.027 % in-
crease in administrative expenses. Although the magnitude of the increase is smaller compared to the selling and administrative
expense ratio, it still signies that having more rookie independent directors is associated with slightly higher administrative costs.
Similarly, the coefcient for LN-RIDs is 0.103 (t-value of 11.62), showing that a 1 % increase in the number of rookie independent
directors is associated with a 0.103 % increase in administrative expenses.
However, the TATO ratio is taken as an inverse proxy of agency cost and a negative sign shows that rookie independent directors
presence curbs the efcient asset utilization. We can infer from the coefcients that a 1 % increase in the proportion of rookie in-
dependent directors results in a 0.040 % decrease in the total asset turnover ratio. The coefcient for LN-RIDs in the TATO ratio model
is −0.035, with a t-value of −3.750. This signies that a 1 % increase in the number of rookie independent directors results in a 0.035
% decrease in the total asset turnover ratio. These ndings highlight the negative impact of changes in RIDs proxies on asset turnover
ratio, signifying potential inefciencies in asset utilization associated with the presence of rookie independent directors.
Control variables such as Board Size (BS), Board Independence (BI), CEO Duality (CEOD), CEO Tenure (CEOT), Leverage (Lev),
State Ownership (SO), Growth of Firm (Growth), Tobin’s Q (TQ), and Firm Age (FA) also demonstrate signicant effects in various
models, contributing to the overall explanatory power of the regression. In summary, the results suggest that the inclusion of rookie
independent directors tends to enhance agency costs, particularly in terms of selling and administrative expenses.
The ndings indicate that the presence of rookie independent directors positively impacts agency costs, particularly in terms of
selling and administrative expenses. This aligns with prior studies highlighting the potential inefciency of rookie directors in fullling
their monitoring role [5]. The positive association between rookie directors and agency costs underscores the importance of
considering director expertise and experience in corporate governance structures [59]. Despite controlling for various rm-level
factors, the persistent positive relationship underscores the need for careful selection and monitoring of board members to mitigate
agency costs effectively. Agency theory, as outlined by Jensen and Meckling (1976) [7], suggests that independent directors play a
crucial role in mitigating agency conicts by overseeing management actions. However, the inexperience of RIDs can result in less
effective oversight, leading to higher administrative and operational expenses Hence hypothesis 1is accepted, which implies that
rookie independent directors enhance agency costs.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
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Table 3
Correlation matrix.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 VIF
1. S&AdmExp ratio 1.00
2. AdmExp ratio 0.86 1.00
3. TATO ratio 0.67 0.81 1.00
4. RIDs% 0.22 0.16 −0.36 1.00 1.03
5. LN-RIDs 0.02 0.04 −0.03 −0.37 1.00 1.11
6. QFIIs −0.01 0.00 0.01 −0.10 0.18 1.00 1.07
7. GD −0.06 −0.07 0.05 −0.04 −0.01 −0.02 1.00 1.01
8. BS 0.09 0.10 −0.10 0.03 0.02 0.07 −0.12 1.00 1.12
9. BI 0.11 0.14 −0.11 0.09 −0.03 0.03 −0.11 0.77 1.00 1.15
10. CEOD −0.03 −0.04 0.04 −0.04 −0.04 −0.04 0.11 −0.18 −0.13 1.00 1.02
11. CEOT −0.01 0.01 −0.01 0.00 −0.02 −0.04 0.00 0.02 0.06 −0.01 1.00 1.06
12. Lev 0.07 0.08 −0.09 0.01 0.05 0.04 −0.10 0.17 0.17 −0.16 0.06 1.00 1.28
13. SO 0.08 0.11 −0.08 0.25 −0.16 0.12 −0.19 0.29 0.27 −0.29 0.00 0.32 1.00 1.50
14. Growth 0.80 0.95 −0.86 0.15 −0.04 −0.01 −0.07 0.09 0.12 −0.04 0.01 0.08 0.10 1.00 1.37
15. TQ 0.01 0.00 0.01 0.01 0.01 0.04 0.01 −0.01 −0.01 0.03 −0.04 −0.09 −0.04 0.00 1.00 1.04
16. FA 0.05 0.07 −0.05 0.05 −0.02 0.02 −0.07 0.05 0.08 −0.07 0.00 0.05 0.13 0.06 −0.01 1.00 1.26
Table 3 shows the correlation matrix of interdependent variables used in the analysis. The last Column shows the VIF factors among the variables. The data covers the period 2009 to 2020, with 26900
rm-year observations. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
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4.3.2. Moderating effect of qualied institutional investors on the relationship between RIDs and agency Costs
Table 5 presents the results of the moderating effect of Qualied Foreign Institutional Investors (QFIIs) on the relationship between
rookie independent directors and agency costs, considering three dimensions of agency costs. For the S&AdmExp ratio, the interaction
term RIDs%*QFIIs has a coefcient of −0.103, which is statistically signicant at the 1 % level (t-value of −7.22). This indicates that
the relationship between the percentage of rookie independent directors (RID%) and the selling and administrative expense ratio is
moderated by the presence of qualied foreign institutional investors (QFIIs). Specically, for each 1 % increase in QFIIs, the positive
effect of RID% on the selling and administrative expense ratio decreases by 0.103 %. In the administrative expense ratio context, the
interaction term RIDs%*QFIIs has a coefcient of −0.120, which is also statistically signicant at the 1 % level (t-value of −3.12). This
means that for each 1 % increase in QFIIs, the positive effect of RID% on administrative expenses decreases by 0.120 %. The interaction
term RIDs%*QFIIs in the TATO ratio model has a positive coefcient of 0.225, statistically signicant at the 1 % level (t-value of 5.20).
This indicates that for each 1 % increase in QFIIs, the negative effect of RID% on the total asset turnover ratio is moderated, turning it
into a positive effect. Economically, this implies that QFIIs signicantly reduce administrative inefciencies that might arise from
having more rookie independent directors. Their involvement likely brings better oversight and more stringent management practices,
thus lowering the additional administrative costs associated with rookie directors.
For the second proxies of LN-RIDs, the interaction term LN-RIDs*QFIIs has a coefcient of −0.093, signicant at the 1 % level (t-
value of −4.60). This means that for each 1 % increase in QFIIs, the positive impact of the number of rookie independent directors (LN-
RIDs) on the selling and administrative expense ratio decreases by 0.093 %. For the administrative expense ratio, the interaction term
LN-RIDs*QFIIs indicates that with a 1 % increase in QFIIs, the positive effect of LN-RIDs on administrative expenses decreases by
0.0374 %. The interaction term LN-RIDs*QFIIs in the TATO ratio model has a negative coefcient of −0.0441, signicant at the 1 %
level (t-value of −4.42). This signies that for each 1 % increase in QFIIs, the negative impact of LN-RIDs on the total asset turnover
ratio becomes even more pronounced, decreasing by an additional 0.0441 %.
The moderation effect of QFIIs on the relationship between RIDs and agency costs may stem from several factors. First, QFIIs often
bring in international best practices and corporate governance standards, exerting pressure on rms to improve governance mecha-
nisms and reduce agency costs [27]. Second, their presence may enhance transparency and disclosure practices, leading to better
monitoring of managerial actions and reducing the need for extensive administrative expenses (Li, Wang, Wu et al., 2021). Finally,
QFIIs’involvement may signal to the market a commitment to good governance, thereby positively inuencing investor perceptions
and reducing agency costs [60]. RDT suggests that rms rely on external resources, like QFIIs, to access capital markets and signal
Table 4
Rookie Independent Directors and agency cost.
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
RID% 0.240*** 0.027*** −0.040***
(3.02) (5.465) (-2.475)
LN-RIDs 0.160*** 0.103*** −0.035***
(8.938) (11.62) (-3.750)
BS −0.048*** −0.023*** −0.035*** −0.116*** −0.291*** −0.139***
(-3.435) (-3.319) (-3.622) (-3.250) (-3.983) (-3.768)
BI −0.300** −0.074 0.326*** 0.351*** 0.457 0.379*
(-2.496) (-0.960) (5.361) (9.175) (1.278) (1.855)
CEOD 0.090*** 0.107*** 0.068*** 0.036*** −0.002 −0.008
(2.726) (4.692) (4.102) (3.160) (-0.0259) (-0.145)
CEOT −0.272*** −0.036 −0.001 0.040 −0.373* −0.136
(-3.545) (-0.660) (-0.0162) (1.507) (-1.947) (-1.032)
Lev −0.223*** −0.221*** −0.129*** −0.162*** 0.094 0.078**
(-8.453) (-12.46) (-9.833) (-18.47) (1.637) (2.036)
SO −0.183*** −0.213*** 0.116*** 0.071*** −0.178* 0.088
(-5.521) (-9.778) (6.939) (6.542) (-1.894) (1.524)
Growth 0.920*** 0.871*** 0.686*** 0.720*** 0.623*** 0.657***
(79.94) (112.1) (122.0) (189.1) (21.60) (33.35)
TQ 0.125*** 0.098*** 0.023*** 0.012** 0.092** 0.110***
(9.103) (10.45) (3.308) (2.458) (2.320) (4.059)
FA −0.064 −0.079 0.227*** 0.188*** −0.219 −0.218
(-0.816) (-1.442) (5.767) (6.899) (-1.051) (-1.602)
Constant −0.430 0.694** 2.830*** 2.620*** 7.210*** 5.710***
(-1.013) (2.359) (13.30) (18.01) (6.284) (7.604)
Year FE’s Yes Yes Yes Yes Yes Yes
Firm FE’s Yes Yes Yes Yes Yes Yes
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R-squared 0.0499 0.0483 0.0713 0.0744 0.0621 0.064
Table 4 shows the regression results of the impact of RIDs on agency costs. Columns (1) and (2) are for the effect of RIDs proxies on S&AdmExp ratio.
Columns (3) and (4) represent the effect of RIDs on AdmExp ratio, while Columns (5) and (6), show the effect of RIDs on TATO ratio. Year and rm
xed effects are controlled for. Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed),
respectively. The data covers the period 2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
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governance commitment, aligning with market expectations and mitigating agency costs [11].
4.3.3. Moderating effect of gender diversity on the relationship between RIDs and agency Costs
Table 6 explores the relationship between RIDs and agency costs by introducing the moderating effect of GD. The main effects
reveal that an increase in the RIDs% positively inuences agency costs. However, the introduction of the interaction term changes the
dynamics. The interaction term, LN-RIDs*GD, presents a negative coefcient, signifying a reversal in the direction of the relationship.
This change suggests that when considering the moderating effect of Gender Diversity, the positive impact of rookie independent
directors on agency costs diminishes or even takes a negative turn. The coefcients of LN-RIDs*GD further emphasize this reversal,
underscoring a shift in the relationship between the tenure of independent directors and agency costs. Notably, the gender diversity
variable, GD, has a negative and signicant coefcient in the main effects, indicating that higher gender diversity on boards is
associated with reduced agency costs.
Research suggests that gender-diverse boards are more inclined towards collaborative decision-making and risk management,
potentially mitigating agency problems [41,61]. Additionally, diverse boards are associated with enhanced monitoring mechanisms
and increased accountability [62,63], which may counterbalance the potential adverse effects of rookie directors on agency costs.
Agency theory expoubds that diverse boards can mitigate agency problems by providing different perspectives and enhancing over-
sight. The negative coefcient of the interaction term indicates that gender diversity weakens the positive impact of RIDs on agency
costs. Agency theory suggests that diverse boards can provide different perspectives and enhance oversight, reducing the risks posed by
inexperienced directors [33]. The study’s ndings that gender diversity moderates the positive impact of RIDs on agency costs align
with the literature, which indicates that female directors contribute to more rigorous oversight and improved governance practices
[35] This signies that when boards are more gender-diverse, rookie independent directors’effectiveness in reducing agency costs
diminishes. Hence, hypothesis H3 is accepted.
Table 5
Moderating effect of Qualied Foreign Institutional Investors.
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
RIDs% 0.152*** 0.121*** −0.0120***
(10.25) (8.95) (-3.45)
LN-RIDs 0.0725*** 0.0350*** −0.0240***
(4.66) (6.35) (-3.085)
QFIIs −0.0860*** −0.047*** 0.011*** −0.155*** −0.216 0.248***
(-5.30) (-5.60) (5.30) (-4.10) (-1.14) (3.83)
RIDs%*QFIIs −0.103*** −0.120*** 0.225***
(-7.22) (-3.12) (5.20)
LN-RIDs*QFIIs −0.093*** −0.0374*** −0.0441***
(-4.60) (-4.63) (-4.42)
BS −0.0071 −0.215* 0.0342*** 0.0555*** −0.0167 −0.0181
(-0.09) (-1.65) (2.75) (3.15) (-0.28) (-0.20)
BI 0.109*** 0.0710** 0.0381 0.00314 −0.251* −0.506***
(4.50) (2.05) (1.30) (0.06) (-1.85) (-2.60)
CEOD −0.0156 −0.287*** −0.168*** −0.125*** 0.0633 0.0544
(-0.27) (-3.55) (-17.5) (-8.80) (1.55) (0.90)
CEOT −0.207*** −0.189*** 0.0543*** 0.0949*** 0.0963 −0.135
(-10.7) (-6.70) (4.55) (5.30) (1.60) (-1.35)
Lev −0.223*** −0.226*** 0.718*** 0.685*** 0.668*** 0.645***
(-9.40) (-6.35) (174.5) (112.0) (32.0) (21.1)
SO 0.853*** 0.893*** 0.00500 0.0200*** 0.0979*** 0.0785*
(102.0) (71.5) (0.91) (2.70) (3.35) (1.82)
Growth 0.1000*** 0.124*** 0.182*** 0.228*** −0.255* −0.333
(9.70) (8.40) (6.20) (5.50) (-1.80) (-1.54)
TQ −0.142** −0.113 2.533*** 2.847*** 5.836*** 7.300***
(-2.45) (-1.35) (16.2) (12.3) (7.40) (6.10)
FA 1.296*** 0.359 0.182*** 0.228*** −0.255* −0.333
(4.10) (0.77) (6.20) (5.50) (-1.80) (-1.54)
Constant 1.296*** 0.359 2.533*** 2.847*** 5.836*** 7.300***
(4.10) (0.77) (16.2) (12.3) (7.40) (6.10)
Year FE’s Yes Yes Yes Yes Yes Yes
Firm FE’s Yes Yes Yes Yes Yes Yes
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
0.0475 0.0482 0.051 0.049 0.0491 0.0487
Table 5 shows the regression results of the moderating impact of Qualied Financial Institutional Investors on the relationship between RIDs and
agency costs. The moderating effect of QFIIs in Columns (1) and (2) is for the effect of RIDs proxies on S&AdmExp ratio. The moderating effect of QFIIs
in Columns (3) and (4) represent the effect of RIDs on AdmExp ratio, while Columns (5) and (6), show the effect of RIDs on TATO ratio. Year and rm
xed effects are controlled for. Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed),
respectively. The data covers the period 2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
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4.4. Robust analysis
4.4.1. Alternative measure of rookie independent directors
Table 7 presents alternative measures of RIDs to test hypotheses 1, 2, and 3, exploring their impact on agency costs and the
moderating effects of QFIIs and GD. This analysis provides valuable insights into the critical mass effect of RIDs on agency costs and
how external factors inuence this relationship.
The main effects of the RIDs alternative measure, RIDs-CM, reveal signicant coefcients across all three dimensions of agency
costs (S&AdmExp ratio, AdmExp ratio, and TATO ratio). The positive coefcients for RIDs-CM in the S&AdmExp ratio, AdmExp ratio,
and the negative coefcient in the TATO ratio suggest that a higher presence of rookie independent directors, as measured by RIDs-CM,
is associated with increased agency costs. Alternatively, we can interpret it as the coefcient of RIDs-CM, which indicates that a 1 %
change in RIDs leads to a 0.109 % increase in the selling and administrative expense ratio. Similarly, a 1 % change in RIDs-CM results in
a 0.0965 % increase in the administrative expense ratio. Conversely, a 1 % change in RIDs-CM corresponds to a −0.127 % decrease in
the asset turnover ratio. This negative coefcient suggests that increased RIDs is associated with decreased asset turnover, indicating
inefciencies in asset utilization and management.
Introducing QFIIs as a moderator, the interaction term RIDs-CM* QFIIs demonstrates negative coefcients, indicating a moderating
effect on the relationship between RIDs-CM and agency costs. Similarly, the introduction of GD as a moderator reveals interesting
dynamics. The coefcients for RIDs-CM*GD in the S&AdmExp ratio and AdmExp ratio are negative. In contrast, the TATO ratio is
positive, indicating that gender diversity moderates the relationship between RIDs-CM and these dimensions of agency costs. The
economic signicance of the variables suggests that the interaction term RIDs-CM*QFIIs exhibits coefcients of −0.175, −0.183, and
0.172 for the selling and administrative expense ratio, administrative expense ratio, and asset turnover ratio, respectively. This means
that rookie independent directors, in the presence of qualied institutional investors, mitigate the agency costs. Similarly, a 1 % change
in the interaction term RIDs-CM*GD results in respective changes of −0.161 % in the selling and administrative expense ratio, −0.181
Table 6
The moderating effect of Gender Diversity.
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
RIDs% 0.127*** 0.0685*** 0.0490
(10.30) (9.70) (1.30)
GD −0.115*** −0.093*** −0.127*** −0.098*** 0.116*** 0.0965***
(-5.10) (-4.30) (-4.70) (-3.10) (5.05) (3.50)
RIDs%*GD −0.185*** −0.0350*** 0.176***
(-5.40) (-2.92) (5.35)
LN-RIDs 0.0140*** −0.0240*** −0.0850***
(3.10) (-4.00) (-2.70)
LN-RIDs*GD 0.188*** 0.199*** −0.190***
(3.30) (5.30) (-4.50)
BS −0.0250 0.0560 −0.134*** −0.0330 −0.117 −0.225
(-0.35) (0.51) (-3.73) (-0.60) (-0.65) (-0.76)
BI −0.0550 −0.300** 0.354*** 0.302*** 0.350* 0.432
(-0.71) (-2.45) (9.20) (4.95) (1.70) (1.21)
CEOD 0.104*** 0.0830** 0.0430*** 0.0700*** −0.0050 −0.0310
(4.53) (2.50) (3.70) (4.14) (-0.09) (-0.37)
CEOT −0.0280 −0.275*** 0.0440 −0.0110 −0.163 −0.450**
(-0.52) (-3.60) (1.60) (-0.25) (-1.25) (-2.35)
Lev −0.230*** −0.227*** −0.167*** −0.135*** 0.0750* 0.0910
(-13.0) (-8.60) (-19.0) (-10.2) (1.95) (1.60)
SO −0.181*** −0.182*** 0.0740*** 0.114*** 0.0680 −0.165*
(-8.10) (-5.50) (6.60) (6.80) (1.15) (-1.75)
Growth 0.870*** 0.920*** 0.720*** 0.692*** 0.665*** 0.630***
(112.0) (79.70) (189.0) (122.5) (33.5) (21.6)
TQ 0.0980*** 0.124*** 0.0100** 0.0225*** 0.107*** 0.0890**
(10.30) (8.90) (2.10) (3.25) (3.95) (2.20)
FA −0.0740 −0.0610 0.179*** 0.215*** −0.208 −0.235
(-1.35) (-0.77) (6.50) (5.50) (-1.55) (-1.15)
Year FE’s Yes Yes Yes Yes Yes Yes
Firm FE’s Yes Yes Yes Yes Yes Yes
Constant 0.540* −0.445 2.545*** 2.820*** 5.515*** 7.145***
(1.85) (-1.04) (17.50) (13.25) (7.35) (6.20)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
0.0482 0.0498 0.0746 0.0715 0.0366 0.0323
Table 6 shows the regression results of the moderating impact of Gender Diversity on the relationship between rookie IDs and agency costs. The
moderating effect of GD in Columns (1) and (2) is for the effect of RIDs proxies on S&AdmExp ratio. The moderating effect of GD in Columns (3) and
(4) represents the effect of RIDs on AdmExp ratio, while Columns (5) and (6), shows the effect of RIDs on TATO ratio. Year and rm xed effects are
controlled for. Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed), respectively. The
data covers the period 2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
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Table 7
Alternative measures of rookie independent directors to test hypothesis 1 and 2.
VARIABLES (1) (2) (3) (4) (5) (6) (7) (8) (9)
S&AdmExp ratio AdmExp ratio TATO ratio S&AdmExp ratio AdmExp ratio TATO ratio S&AdmExp ratio AdmExp ratio TATO ratio
RIDs-CM 0.109*** 0.0965*** −0.127*** 0.136*** 0.0962*** −0.117*** 0.106*** 0.094 −0.128
(3.334) (6.75) (-4.544) (3.452) (3.33) (-3.428) (3.88) (4.02) (-3.27)
QFIIs −0.082*** −0.0486*** 0.0506***
(-4.915) (-3.270) (3.742)
RIDs-CM*QFIIs −0.175*** −0.183*** 0.172***
(-4.819) (-3.095) (3.328)
GD −0.172** −0.127** 0.096***
(-1.965) (-2.218) (4.720)
RIDs-CM*GD −0.161*** −0.181*** 0.172
(-4.097) (-4.659) (4.062)
BS −0.0526 −0.166*** −0.157 −0.0583 −0.155*** −0.164 −0.0460 −0.163*** −0.130
(-1.098) (-5.301) (-0.789) (-1.202) (-4.735) (-0.792) (-0.962) (-5.208) (-0.650)
BI −0.0367 −0.0811*** 0.353 −0.0281 0.0889*** 0.426* −0.0308 0.0734** 0.316
(-0.774) (-2.604) (1.612) (-0.585) (2.712) (1.883) (-0.652) (2.359) (1.441)
CEOD 0.0218 0.00579 0.0233 0.0178 0.00411 0.000757 0.0221 0.00645 0.0284
(1.527) (0.614) (0.383) (1.216) (0.411) (0.0118) (1.555) (0.685) (0.463)
CEOT 0.0346 0.186*** −0.217 0.0968*** 0.180*** −0.277* 0.0294 0.171*** −0.258*
(1.026) (8.470) (-1.414) (2.736) (7.586) (-1.743) (0.878) (7.738) (-1.679)
Lev 0.0195 −0.00875 0.228*** 0.00732 −0.0214** 0.201*** 0.0198 −0.00846 0.220***
(1.567) (-1.089) (5.216) (0.574) (-2.510) (4.342) (1.597) (-1.056) (5.000)
SO −0.138*** −0.0478*** 0.0263 −0.166*** −0.0655*** 0.0178 −0.133*** −0.0417** 0.0189
(-4.795) (-2.920) (0.362) (-5.586) (-3.802) (0.235) (-4.594) (-2.527) (0.257)
Growth 0.838*** 0.723*** 0.649*** 0.835*** 0.732*** 0.660*** 0.836*** 0.727*** 0.656***
(122.6) (173.9) (27.49) (117.3) (164.5) (26.14) (122.9) (174.8) (27.49)
TQ −0.0490*** −0.0518*** 0.0626** −0.0502*** −0.0607*** 0.0481 −0.0501*** −0.0512*** 0.0593**
(-10.09) (-15.96) (2.182) (-10.11) (-17.61) (1.566) (-10.40) (-15.81) (2.060)
FA 0.0549** 0.0884*** −0.124 0.0310 0.0773*** −0.185 0.0463* 0.0841*** −0.112
(2.287) (5.447) (-0.965) (1.287) (4.565) (-1.352) (1.939) (5.191) (-0.871)
Year FE’s Yes Yes Yes Yes Yes Yes Yes Yes Yes
Firm FE’s Yes Yes Yes Yes Yes Yes Yes Yes Yes
Constant 0.140 0.553* 0.231 2.915*** 2.763*** 3.032*** 6.149*** 6.230*** 6.219***
(0.682) (1.929) (1.108) (22.00) (14.32) (22.57) (7.221) (4.842) (7.170)
Observations 28,600 28,600 28,600 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
0.045 0.044 0.051 0.038 0.034 0.046 0.045 0.044 0.041
Table 7 shows the regression results between rookie IDs (alternative measure) and agency costs. The effect of RIDs-CM on different proxies of AC are depicted in Columns (1), (2), and (3). The moderating
effect of QFIIs in Columns (4), (5), and (6) are for the effect of alternative proxy on AC. The moderating effect of GD in Columns (7), (8), and (9) represents the effect of RIDs alternative measures on AC
Year and rm xed effects are controlled for. Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed), respectively. The data covers the period
2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
13
% in the administrative expense ratio, and 0.172 % in the asset turnover ratio. This moderation effect suggests that gender diversity on
boards amplies the scrutiny of managerial decisions and oversight, leading to more efcient resource allocation and reduced agency
costs.
4.4.2. Alternative measure of agency cost
Table 8 presents alternative measures of agency costs (QFCF) to test hypotheses 1, 2, and 3, focusing on the impact of RIDs and their
interaction with Qualied Foreign Institutional Investors (QFIIs) and GD. The coefcients for rookie independent directors (RIDs% and
LN-RIDs) in QFCF reveal a signicant positive relationship, indicating that a higher percentage of rookie independent directors is
associated with increased agency costs. Introducing QFIIs and GD as a moderator, the interaction terms RIDs%*QFIIs and RIDs%*GD
exhibit negative coefcients in QFCF, suggesting a moderating effect.
4.4.3. Alternative estimation techniques
4.4.3.1. Instrumental variable estimations. Instrumental variable estimation is a powerful technique used to mitigate endogeneity by
introducing instruments that are correlated with the endogenous explanatory variables but are uncorrelated with the error term. In this
study, the authors used the ratio of rst-year independent directors within the same region as an instrument for RIDs. This approach is
grounded in the methodology of Chen and Keefe (2020) [6], who demonstrated that regional preferences for independent directors can
serve as valid instruments, reecting local supply without being directly related to rm-specic agency costs. The IV approach helps
control for unobservable factors that might simultaneously affect the proportion of RIDs and agency costs. For instance, certain un-
observed managerial qualities or rm-specic policies might inuence both the appointment of RIDs and the resulting agency costs. By
Table 8
Alternative measures of agency cost to test hypothesis 1 and 2.
VARIABLES (1) (2) (3) (4) (5) (6)
QFCF QFCF QFCF QFCF QFCF QFCF
RIDs% 0.083*** 0.105***
(3.14) (10.30)
LN-RIDs 0.0950*** 0.103***
(4.32) (4.10)
RIDs%*QFIIs −0.150***
(-4.62)
LN-RIDs*QFIIs −0.167***
(-3.42)
RIDs%*GD −0.125***
(-5.40)
LN-RIDs*GD −0.389**
(-2.25)
BS −0.150 −0.367** −0.126 0.785*** −0.025 −0.297**
(-1.41) (-2.25) (-1.10) (4.12) (-0.34) (-2.45)
BI 0.572*** 0.795*** 0.530*** −0.067 −0.055 0.082**
(5.04) (4.46) (4.37) (-1.30) (-0.71) (2.50)
CEOD −0.047 −0.081 −0.041 0.106 0.104*** −0.274***
(-1.36) (-1.64) (-1.10) (0.94) (4.53) (-3.60)
CEOT 0.196*** 0.145 0.156* 0.114*** −0.0280 −0.225***
(7.30) (1.32) (1.87) (2.70) (-0.52) (-8.60)
Lev 0.015 0.136*** 0.190*** −0.0750 −0.230*** −0.182***
(0.44) (3.43) (6.51) (-1.45) (-13.0) (-5.50)
SO 0.720*** −0.0850* 0.020 0.715*** −0.181*** 0.920***
(63.00) (-1.78) (0.57) (39.20) (-8.10) (79.70)
Growth 0.0690*** 0.710*** 0.721*** 0.024 0.870*** 0.124***
(4.85) (41.90) (58.50) (1.12) (112.0) (8.90)
TQ 0.121 0.0420** 0.0540*** 0.0450 0.0980*** −0.061
(1.48) (2.11) (3.54) (0.36) (10.30) (-0.77)
FA 2.580*** 0.0860 0.0620 3.280*** −0.0740 −0.445
(5.97) (0.75) (0.71) (4.82) (-1.35) (-1.04)
Year FE’s Yes Yes Yes Yes Yes Yes
Firm FE’s Yes Yes Yes Yes Yes Yes
Constant 2.581*** 3.211*** 2.744*** 3.284*** 0.537* −0.442
(5.973) (5.091) (5.893) (4.826) (1.827) (-1.033)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
Table 8 shows the regression results between rookie IDs and agency costs (alternative measure). The effect of RIDs proxies on alternative measures of
AC are depicted in Columns (1) and (2). The moderating effect of QFIIs in Columns (3) and (4) is for the effect of alternative proxy on AC. The
moderating effect of GD in Columns (5) and (6) represents the effect of RIDs on AC alternative measures Year and rm xed effects are controlled for.
Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed), respectively. The data covers
the period 2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
14
using the ratio of rst-year independent directors in the region as an instrument, the authors aim to isolate the exogenous variation in
RIDs that is not confounded by these unobserved factors, thus providing more reliable estimates of the impact of RIDs on agency costs.
Table 9 presents the results of instrumental variable (IV) estimation in two stages for examining the relationship between RIDs and
agency costs. In the rst stage, Columns (1) and (2) display the results of the rst-stage regression. The coefcients for First-year ID (%)
t-1, which is the instrument used to address endogeneity concerns, are reported alongside their respective t-statistics in parentheses.
The positive and statistically signicant coefcients conrm that rms are more likely to appoint rookie IDs with an increasing
percentage of rst-year IDs in the same region. Additionally, the Cragg-Donald Wald F statistics are provided to assess the strength of
the instruments, with values exceeding the threshold indicating the absence of weak instrument problems.
Moving to the second stage, Columns (3) and (4) present the results of the second-stage regression, focusing on the relationship
between RIDs variables (RIDs% and LN-RIDs) and S&AdmExp ratio, controlling for various factors such as Board Size (BS), Board
Independence (BI), CEO Duality (CEOD), CEO Tenure (CEOT), Leverage (Lev), State Ownership (SO), Growth of Firm (Growth),
Tobin’s Q (TQ), and Firm Age (FA). The coefcients for the instrumental variables IVRIDs% and IVLN-RIDs indicate the effect of RIDs
on the S&AdmExp ratio after addressing endogeneity concerns.
4.4.3.2. Panel xed effect estimations. Table 10 presents the results of alternative estimation techniques, specically xed effects
models, divided into three panels: Panel A, Panel B, and Panel C. Each panel examines different variables and their effects on agency
costs, focusing on various measures of RIDs and their interactions with other factors.
In Panel A, the rst three columns focus on the direct effects of RIDs variables on agency costs (S&AdmExp ratio). The coefcients
for RIDs% and LN-RIDs are positive and statistically signicant across all three specications, indicating that a higher percentage of
rookie independent directors and their presence lead to increased agency costs. In Panel B, the analysis introduces moderating var-
iables, such as Qualied Foreign Institutional Investors (QFIIs), and examines their interaction with RIDs variables. The coefcients for
RIDs (RIDs% and LN-RIDs) and their interaction with QFIIs are negative and statistically signicant, indicating that QFIIs moderate the
positive impact of RIDs on agency costs. In Panel C, the focus shifts to the interaction between RIDs variables and GD. The coefcients
for proxies of RIDs and GD are negative and statistically signicant, suggesting that gender diversity moderates the relationship
Table 9
Instrumental variables estimation.
First Stage Second Stage
(1) (2) (3) (4)
RIDs% LN-RIDs S&AdmExp ratio S&AdmExp ratio
First-year ID(%)
t-1
0.188*** 0.196***
(6.55) (8.73)
IVRIDs% 0.118***
(3.55)
IVLN-RIDs 0.168***
(3.82)
BS −0.0530 −0.167*** −0.158 −0.0590
(-1.10) (-5.30) (-0.79) (-1.20)
BI −0.0370 0.0820*** 0.354 −0.0290
(-0.78) (2.60) (1.61) (-0.59)
CEOD 0.0220 0.0060 0.0235 0.0180
(1.53) (0.61) (0.38) (1.22)
CEOT 0.0350 0.187*** −0.216 0.0970***
(1.03) (8.47) (-1.41) (2.74)
Lev 0.020 −0.0090 0.229*** 0.0080
(1.57) (-1.09) (5.22) (0.57)
SO −0.139*** −0.048*** 0.027 −0.167***
(-4.80) (-2.92) (0.36) (-5.59)
Growth 0.839*** 0.724*** 0.650*** 0.836***
(122.7) (174.0) (27.50) (117.4)
TQ −0.0500*** −0.0520*** 0.0630** −0.0510***
(-10.10) (-15.97) (2.18) (-10.12)
FA 0.055** 0.089*** −0.125 0.032
(2.29) (5.45) (-0.97) (1.29)
Year FE’s Yes Yes Yes Yes
Firm FE’s Yes Yes Yes Yes
Constant 0.140 0.553* 0.231 2.915***
(0.682) (1.929) (1.108) (22.00)
Cragg-Donald Wald F test 45.81 66.70
Observations 28,600 28,600 28,600 28,600
Table 9 shows the regression results of the impact of rookie IDs on agency costs using the instrumental variable approach. The instrument variable is
First–year ID(%)t-1. In the rst stage, RIDs% and LN-RIDs are the dependent variables. The test variables in the second stage are IVRIDs% and IVLN-
RIDs. Year and rm xed effects are controlled for. Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 %
levels (two-tailed), respectively. All variables are dened in Table 1.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
15
between RIDs and agency costs.
4.4.3.3. Generalized methods of moments estimations. The Generalized Method of Moments (GMM) is another robust technique used to
address endogeneity and measurement errors in panel data. This approach, advocated by Ullah et al. (2024) [64], leverages moment
conditions derived from the data to obtain consistent parameter estimates. GMM is particularly useful in dynamic panel data models
where the dependent variable is inuenced by its past values, and potential endogeneity arises from the simultaneity between
explanatory variables and the error term. The GMM estimations in this study help control for unobserved heterogeneity and potential
Table 10
Alternative Estimation technique (Fixed Effect).
Panel A
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
RIDs% 0.1247*** 0.102*** −0.107***
(2.709) (16.73) (-3.217)
LN-RIDs 0.110*** 0.128*** −0.105***
(3.135) (4.043) (-3.027)
Constant −0.0841 1.113*** 3.165*** 3.199*** 3.534** 2.382
(-0.404) (3.827) (23.07) (15.74) (2.299) (1.018)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
0.0529 0.052 0.0668 0.0641 0.0639 0.0513
Panel B
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
RIDs% 0.0318*** 0.0946*** −0.104***
(2.935) (12.45) (-3.160)
QFIIs −0.0339*** 0.0786*** −0.022*** −0.0358*** 0.0569*** 0.0391***
(-3.061) (-0.361) (-2.992) (-3.223) (3.01) (2.890)
RIDs%*QFIIs −0.1921*** −0.216*** 0.188***
(-2.952) (-2.382) (2.190)
LN-RIDs −0.0614 −0.0906*** 0.117***
(-3.064) (-2.856) (2.637)
LN-RIDs*QFIIs −0.1854*** −0.1726*** 0.119***
(-3.081) (-4.244) (2.487)
Constant 0.0131 0.873*** 2.824*** 2.580*** 2.641 1.523
(0.0599) (2.861) (18.93) (11.71) (1.477) (0.544)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
0.0546 0.0538 0.0678 0.0654 0.044 0.05
Panel C
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
RIDs% 0.0114*** 0.103*** −0.116***
(2.229) (2.53) (-4.130)
GD 0.116*** 0.151*** −0.206*** 0.137*** 0.199*** 0.172***
(3.074) (3.863) (-3.630) (3.661) (5.401) (4.915)
RIDs%*GD −0.0769 0.00974 −0.557
(-1.365) (0.261) (-1.371)
LN-RIDs 0.062*** 0.0340*** 0.0482***
(3.05) (4.406) (5.574)
LN-RIDs*GD −0.201*** −0.188*** 0.1521***
(-4.06) (-2.753) (5.687)
Constant −0.0709 1.061*** 3.079*** 3.149*** 3.000* 2.162
(-0.340) (3.678) (22.34) (15.51) (1.914) (0.893)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Adj. R
2
0.0534 0.0531 0.0675 0.0648 0.041 0.043
t-statistics in parentheses.
***p <0.01, **p <0.05, *p <0.1.
Table 10, panel A, shows the regression results between RIDs and agency costs (alternative measure) using the xed effect model from Column (1) to
Column (6). Panel B shows the moderating effect of QFIIs on the relationship between RIDs and AC. effect of alternative proxy on AC. Panel C shows
the moderating effect of GD on the relationship between RIDs and AC. effect of alternative proxy on AC. Year and rm xed effects are controlled for.
Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed), respectively. The data covers
the period 2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1. For brevity, the result of control variables are not
mentioned.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
16
endogeneity between RIDs and agency costs. The method employs internal instruments derived from lagged values of the explanatory
variables, ensuring that the instruments are exogenous and uncorrelated with the current error term. This approach provides robust
estimates by accounting for potential feedback effects and measurement errors that could bias the results.
Table 11 presents the results of alternative estimation techniques using the Generalized Method of Moments (GMM). The co-
efcients for RID variables, as well as their interaction terms with moderating factors like QFIIs and GD, show similar trends to those
observed in Table 10.
5. Discussion
This study investigates the impact of RIDs on agency costs within Chinese listed rms, utilizing agency theory and resource
dependence theory to contextualize the ndings. By examining the moderating roles of QFIIs and GD, the study provides a compre-
hensive understanding of the multifaceted relationship between RIDs and agency costs, offering valuable insights into corporate
governance dynamics.
5.1. Agency theory perspective
Agency theory, formulated by Jensen and Meckling (1976) [7], explains the conicts of interest between managers (agents) and
shareholders (principals). These conicts arise because managers may pursue personal benets at the expense of shareholders, leading
to agency costs. The traditional view within agency theory posits that independent directors help mitigate these costs by monitoring
management activities. However, this study highlights that RIDs might exacerbate agency costs due to their lack of experience and
expertise, as indicated by the positive association between RIDs and both the S&AdmExp and AdmExp ratios. This nding aligns with
the concerns raised by Fama and Jensen (1983) [31] wherebyinexperienced directors may not effectively oversee managerial actions,
leading to increased agency costs.
The results in this study reveal that RIDs heighten agency costs, supporting the hypothesis that their inexperience undermines their
monitoring effectiveness. This corroborates the ndings of previous studies, such as those by Chen et al. (2022) [5], which underscore
the potential inefciency of RIDs in fullling their monitoring role. However, the study also identies signicant moderating effects of
QFIIs and GD, which help mitigate the adverse impact of RIDs on agency costs. This highlights the importance of robust governance
mechanisms in offsetting the potential drawbacks of RIDs. QFIIs play a crucial role in this context. The interaction term between RIDs
and QFIIs shows a negative and signicant coefcient, indicating that the presence of QFIIs reduces the positive relationship between
RIDs and agency costs. This nding aligns with Lewellen and Lewellen (2022) [65], who argue that institutional investors enhance
corporate governance by demanding greater transparency and accountability. The presence of QFIIs likely introduces stringent
oversight and monitoring practices, thereby mitigating the inefciencies associated with RIDs. Similarly, the study nds that GD
moderates the relationship between RIDs and agency costs. Boards with higher gender diversity are associated with lower agency costs,
as diverse boards bring varied perspectives and enhanced monitoring capabilities, reducing the risks linked with inexperienced di-
rectors. This nding supports Carter et al. (2003) [35], who argue that gender-diverse boards improve governance outcomes through
better decision-making and oversight.
5.2. Resource dependence theory perspective
Resource dependence theory (RDT), introduced by Pfeffer and Salancik (1978) [11] focuses on how organizations manage external
dependencies to secure critical resources for survival and growth. Within this framework, board members are viewed as vital resources
who bring expertise, information, and connections to the rm. From an RDT perspective, RIDs, despite their inexperience, can
contribute valuable external resources and fresh perspectives to the boardroom. The ndings in this studysupport this view, indicating
that while RIDs are associated with increased costs, their interaction with QFIIs and GD signicantly alters this dynamic.
QFIIs, as external stakeholders, bring international best practices and stringent regulatory standards, which enhance the board’s
effectiveness in monitoring and governance. This aligns with the principles of RDT, which emphasize the importance of external
resources in improving organizational performance and stability. The ndings also suggest that QFIIs help reduce agency costs by
fostering better governance practices and enhancing the board’s overall resource pool. Similarly, gender diversity on boards introduces
diverse cognitive approaches and problem-solving styles, which can improve strategic decision-making and risk management. This
supports the view of Beji et al. (2021) [66] that diverse boards are better equipped to manage external dependencies and navigate
complex governance challenges. Results from this study lso reveal that GD positively inuences the effectiveness of RIDs, suggesting
that gender-diverse boards can leverage the fresh perspectives of RIDs to improve governance outcomes. This nding underscores the
importance of board diversity in enhancing the board’s overall resource base and mitigating the potential inefciencies associated with
inexperienced directors.
6. Conclusion
This study aims to investigate the relationship between RIDs and agency costs within the corporate governance framework.
Traditional expectations suggest that RIDs may elevate agency costs due to their inexperience and potential for managerial discretion.
Drawing from agency theory, RIDs are expected to heighten agency costs, but they lack the expertise for effective managerial oversight.
Yet, the moderating effects of Qualied Foreign Institutional Investors (QFIIs) and GD underscore the role of governance mechanisms
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
17
Table 11
Alternative Estimation technique (GMM).
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
L.ACI 0.628*** 0.653***
(15.18) (12.74)
L.AdmExp ratio 0.564*** 0.589***
(25.11) (18.33)
L.TATO ratio 0.131* 0.0593***
(1.803) (3.484)
RIDs% 0.0513*** 0.0141* −0.204*
(3.347) (1.853) (-1.954)
LN-RIDs 0.115*** −0.0461*** −0.0214***
(3.048) (-3.645) (-4.133)
Constant −3.534*** −2.462*** 0.289 0.197 14.01** 14.45**
(-6.649) (-3.222) (0.895) (0.487) (2.377) (2.146)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Panel B: Moderating Effects of QFIIs on the relationship between RIDs and AC
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
L.ACI 0.639*** 0.653***
(13.29) (10.59)
L.AdmExp ratio 0.551*** 0.566***
(23.40) (18.40)
L.TATO ratio 0.119*** 0.0514***
(5.573) (4.406)
RIDs% 0.0417** 0.0194** 0.0372
(2.307) (2.028) (0.243)
LN-RIDs 0.012*** 0.00174 −0.106
(2.91) (0.233) (-0.481)
QFIIs −0.01*** −0.0845*** −0.0272*** −0.058*** 0.069*** −0.028***
(-0.305) (-3.253) (-3.039) (-5.34) (2.948) (3.06)
RIDs%*QFIIs −0.184 0.193 0.205***
(-4.07) (3.165) (3.079)
LN-RIDs*QFIIs −0.173*** −0.162*** 0.187***
(-3.610) (-3.899) (5.377)
Constant −2.656*** −1.151 0.581* 0.690* 11.69* 18.29***
(-4.621) (-1.306) (1.670) (1.666) (1.894) (2.612)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Panel C: Moderating Effects of GD on the Relationship between RIDs and AC
VARIABLES (1) (2) (3) (4) (5) (6)
S&AdmExp ratio S&AdmExp ratio AdmExp ratio AdmExp ratio TATO ratio TATO ratio
L.ACI 0.448*** 0.388***
(9.940) (6.863)
L.AdmExp ratio 0.395*** 0.380***
(16.28) (11.81)
L.TATO ratio 0.0466*** 0.0531***
(5.184) (3.756)
RIDs% 0.0676** 0.0689** 0.0676***
(2.573) (1.989) (3.575)
LN-RIDs 0.114*** 0.091*** −0.066***
(2.933) (2.915) (-4.464)
QFIIs −0.01*** −0.0845*** −0.0272*** −0.058*** 0.069*** −0.028***
(-0.305) (-3.253) (-3.039) (-5.34) (2.948) (3.06)
RIDs%*QFIIs −0.184*** −0.193*** 0.205***
(-4.07) (-3.165) (3.079)
LN-RIDs*QFIIs −0.173*** −0.162*** 0.187***
(-3.610) (-3.899) (5.377)
Constant −2.656*** −1.151 0.581* 0.690* 11.69* 18.29***
(-4.621) (-1.306) (1.670) (1.666) (1.894) (2.612)
Observations 28,600 28,600 28,600 28,600 28,600 28,600
Table 11, panel A, shows the regression results between RIDs and agency costs (alternative measure) using the GM estimates from Column (1) to
Column (6). Panel B shows the moderating effect of QFIIs on the relationship between RIDs and AC. effect of alternative proxy on AC. Panel C shows
the moderating effect of GD on the relationship between RIDs and AC. effect of alternative proxy on AC. Year and rm xed effects are controlled for.
Reported in parentheses are t-values. *, **, and *** indicate signicance at the 10 %, 5 %, and 1 % levels (two-tailed), respectively. The data covers
the period 2009 to 2020, with 26900 rm-year observations. All variables are dened in Table 1. For brevity, the result of control variables is not
mentioned.
W. Bin Khidmat et al. Heliyon 10 (2024) e39366
18
in reducing the adverse impact of RIDs on agency costs.
QFIIs and gender diversity counterbalance the potential drawbacks of RIDs, moderating the relationship between RIDs and agency
costs. QFIIs, with their rigorous regulatory regimes and impartial monitoring, help offset the negative effects of RIDs by fostering
transparency and accountability within rms. Similarly, gender diversity brings diverse perspectives and decision-making styles to the
boardroom, mitigating the risks associated with inexperienced directors and contributing to effective governance practices.
The robustness of the results is demonstrated through alternative measures of RIDs, AC, and estimation techniques, ensuring the
validity and reliability of the ndings. This study contributes to the literature by providing a comprehensive understanding of the
multifaceted relationship between RIDs and agency costs, considering both direct and moderating effects within corporate governance.
The implications of this study extend beyond academic discourse to inform practical considerations for rms and policymakers. First,
organizations should recognize the importance of board diversity and effective governance mechanisms in mitigating agency costs
associated with RIDs. By incorporating QFIIs and promoting gender diversity on boards, rms can enhance transparency, account-
ability, and decision-making processes, ultimately improving rm performance and shareholder value. Second, corporate governance
structures should be designed to balance the power dynamics between CEOs and board members, ensuring accountability and
alignment with shareholder interests.
Due to the reliance on data from a specic regulatory context, namely that of Chinese listed rms, the generalizability of the
conclusions drawn in this study to other countries may be limited. Consequently, caution should be exercised when extrapolating the
ndings to different institutional environments and corporate governance frameworks. Future research endeavors could aim to
overcome this limitation by utilizing datasets from multiple countries or regions to conduct cross-country analyses, thereby enhancing
the external validity of the results and providing a broader understanding of the relationship between RIDs and agency costs across
diverse contexts. Moreover, while the current study primarily focuses on the monitoring function of RIDs in mitigating agency costs, it
is essential to acknowledge that RIDs may also serve a consulting or advisory role within corporate boards. Therefore, future research
could delve deeper into exploring the consulting function of RIDs, examining how their expertise and insights contribute to strategic
decision-making, risk management, and organizational performance beyond mere monitoring.
CRediT authorship contribution statement
Waqas Bin Khidmat: Writing –original draft, Methodology, Investigation, Formal analysis, Data curation, Conceptualization.
Nadia Ashraf: Writing –original draft, Methodology, Investigation, Formal analysis. Sook Fern Yeo: Validation, Supervision, Re-
sources. Cheng Ling Tan: Writing –review &editing, Validation, Supervision. Muhammad Noman Shaque: Validation, Resources,
Methodology.
Data availability statement
Data will be made available upon request.
Declaration of competing interest
The authors declare that they have no known competing nancial interests or personal relationships that could have appeared to
inuence the work reported in this paper.
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