Returnee directors and corporate fraud

Using a dataset of Chinese listed firms, we examine the relationship between Chinese nationals with foreign experience serving as directors (i.e., returnee directors) and the incidence of corporate fraud. We find a significantly negative relationship between returnee directors and fraud. Further, relative to foreign and independent directors, returnee directors do more than other directors in constraining firms’ fraud. These results are robust to endogeneity concerns addressed through propensity score matching and the Oster (2019) test. Further analyses show that the negative relationship between returnee directors and fraud is more pronounced when the returnees (i) have practical overseas work experience, (ii) work in conservative regions of China where the people are more culturally sensitive, and (iii) are appointed as independent directors. Collectively, the findings imply that technical skillset alone is insufficient for effective monitoring; the ability to work in a culturally sensitive manner and maintain professional independence are equally necessary.