Impact of Corporate Fraud on Foreign Direct Investment?

Abstract

The capital market reputation attracts foreign investment. Corporate fraud phenomenon is one of the most crucial aspects that threaten foreign investors. This study investigates the impact of corporate fraud on foreign direct investment FDI. Using data of Chinese listed firms, over the period 2009 to 2017, the results show that corporate fraud is negatively associated with foreign direct investment. This suggests that corporate fraud declines foreign shareholders ratio, and foreign investors avoid investing in a risky environment where their wealth may be expropriated. Further, we explore the impact of having foreign shareholders on corporate fraud. We find that increasing foreign shareholders may help in curbing corporate fraud due to diversified corporate experience and risk-taking behavior. However, the findings remain robust after controlling for the potential endogeneity problem. Our findings have important implications for policymakers and governments as it shows that corporate fraud is a crucial determinant to the cause of foreign direct investment.