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Foreign residency rights and corporate fraud

Author

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  • Chen, Donghua
  • Chen, Yinying
  • Li, Oliver Zhen
  • Ni, Chenkai

Abstract

We examine whether Chinese firms whose controlling persons have foreign residency rights are more likely to engage in corporate fraud. We find a positive association between foreign residency rights and corporate fraud with causality likely going from the former to the latter. Such a finding is robust to an estimation of a bivariate probit model that incorporates undetected fraud. In the cross section, higher managerial ownership, greater analyst coverage and higher institutional holdings mitigate this association. The link, however, diminishes in more recent years after high-profile extraditions of businessmen and regulatory focus on foreign residency rights in the political sector. We conclude that a lower expected probability of getting caught and punished associated with executives with foreign residency rights induces corporate fraud.

Suggested Citation

  • Chen, Donghua & Chen, Yinying & Li, Oliver Zhen & Ni, Chenkai, 2018. "Foreign residency rights and corporate fraud," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 142-163.
    • Handle: RePEc:eee:corfin:v:51:y:2018:i:c:p:142-163
    DOI: 10.1016/j.jcorpfin.2018.05.004
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    Cited by:

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    3. Baoyin Qiu & Bo Cheng & Hangeng Qiu & Kam C. Chan, 2022. "Do firms with foreign residency rights controlling shareholders reduce R&D investment?," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(5), pages 1403-1422, July.
    4. Rauf Ibrahim & Du Jianguo & Santosh Rupa Jaladi & Peter Lartey Yao & Amponsah Clinton Kwabena, 2019. "Determinants of Board Contribution to Internal Controls and Good Governance: Evidence of Rural Banks in Ghana," Journal of Public Administration and Governance, Macrothink Institute, vol. 9(4), pages 85-100, December.
    5. Dongmin Kong & Maobin Wang & Xiyu Zhang, 2018. "The effects of entrepreneurial long-term commitment on post-IPO performance: Chinese evidence," Frontiers of Business Research in China, Springer, vol. 12(1), pages 1-18, December.
    6. Wen, Xi & Tan, Xue & Shen, Zhixuan, 2023. "Fleeing entrepreneurs: “Original sin” suspicion and controlling shareholders’ foreign residency rights," Finance Research Letters, Elsevier, vol. 52(C).
    7. Wang, Ziwei & Yao, Shouyu & Sensoy, Ahmet & Goodell, John W. & Cheng, Feiyang, 2022. "Learning from failures: Director interlocks and corporate misconduct," International Review of Financial Analysis, Elsevier, vol. 84(C).
    8. Hou, Canran & Liu, Huan, 2020. "Foreign residency rights and corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 64(C).
    9. Hou, Xiaohui & Wang, Tengyu & Ma, Caoyuan, 2021. "Economic policy uncertainty and corporate fraud," Economic Analysis and Policy, Elsevier, vol. 71(C), pages 97-110.
    10. Ziwei Wang & Chunfeng Wang & Zhenming Fang, 2023. "Common institutional ownership and corporate misconduct," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 44(1), pages 102-136, January.
    11. Miaowei Peng & Xue Tan, 2023. "Does controlling persons’ foreign residency rights influence executive compensation?," Review of Managerial Science, Springer, vol. 17(7), pages 2375-2416, October.
    12. Liuyang Ren & Xi Zhong & Liangyong Wan, 2022. "Missing Analyst Forecasts and Corporate Fraud: Evidence from China," Journal of Business Ethics, Springer, vol. 181(1), pages 171-194, November.
    13. Duan, Tingting & Yang, Xue & Zhang, Zhe, 2023. "The improvement of legal system, entrepreneur immigration, and corporate cash holdings," International Review of Financial Analysis, Elsevier, vol. 89(C).
    14. Xin Xu & Feng Xiong & Zhe An, 2023. "Using Machine Learning to Predict Corporate Fraud: Evidence Based on the GONE Framework," Journal of Business Ethics, Springer, vol. 186(1), pages 137-158, August.
    15. Xibo Zhao & Dan Yang & Zhengguang Li & Lynda Song, 2021. "Multiple large shareholders and corporate fraud: evidence from China," Frontiers of Business Research in China, Springer, vol. 15(1), pages 1-21, December.
    16. Tan, Xue & Yu, Lin & Fung, Hung-Gay, 2022. "Firms with short-termism: Evidence from expatriate controlling shareholders," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    17. Meng, Qingbin & Li, Haitong & Chan, Kam C., 2023. "Fleeing entrepreneurs: Foreign residency right and corporate risk-taking," Research in International Business and Finance, Elsevier, vol. 65(C).
    18. Chengfang Wang & Tingting Ye & Jiyuan Li & Changli Zeng, 2023. "A Family Member or a Professional Manager? The Role of Trust in the Choice of CEO in Family Firms," Abacus, Accounting Foundation, University of Sydney, vol. 59(1), pages 466-492, March.
    19. Haifeng Hu & Bin Dou & Aiping Wang, 2019. "Corporate Social Responsibility Information Disclosure and Corporate Fraud—“Risk Reduction” Effect or “Window Dressing” Effect?," Sustainability, MDPI, vol. 11(4), pages 1-25, February.

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    More about this item

    Keywords

    Corporate fraud; Foreign residency rights; Corporate governance; China;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • K2 - Law and Economics - - Regulation and Business Law
    • K4 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior

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