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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.
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