Foreign Residency Rights and Corporate Frauds

Abstract

We examine whether Chinese firms whose controlling persons have foreign residency rights are more likely to engage in corporate frauds. We find a positive association between foreign residency rights and the probability of corporate frauds. However, foreign residency rights are mainly associated with less severe forms of frauds. Additional analyses show that strong corporate governance mitigates the association between foreign residency rights and corporate frauds. Extradition agreements between China and controlling persons’ residency countries do not deter their propensity for fraudulent activities. Finally, controlling persons with residency rights in countries with better institutions are more likely to engage in corporate frauds. Our study can help investors better assess firms based on controlling persons’ residency information. It also suggests that Chinese regulators should pay attention to potential culprits with foreign residency rights and that foreign governments should exercise caution when granting residency status.