Do foreign investors deter corporate fraud? Evidence from China

Abstract

This paper investigates the effect of foreign investment on corporate fraud in China. Using a sample of 2,838 firms over the period of 2004–2016, we find that foreign investment helps reduce the risk of corporate fraud. Specifically, foreign investment decreases the likelihood of committing fraud, the frequency of fraud, and its severity. Further evidence suggests that the effect is largely driven by foreign block investment and investment from countries with strong investor protections. Also, the effect of the phenomenon is more pronounced in state-owned enterprises than in non-state-owned enterprises. Our findings suggest that foreign investors play an active monitoring role in emerging markets.