Returnee directors and corporate fraud

Using a large dataset of Chinese listed firms from 2005 to 2018, we examine the relationship between Chinese nationals with foreign experience serving as directors (i.e. returnee directors) and the incidence of corporate fraud. After controlling for the effects of foreign and independent directors, we find a significantly negative relationship between returnee directors and fraud. Further, relative to foreign and independent directors, returnee directors represent a more dominant force in constraining firms’ fraudulent activities. 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 than when they have only educational experience; (ii) work in firms operating in less-developed (more conservative) regions of China where the people are more culturally sensitive; (iii) are appointed as independent directors, instead of executive directors; and (iv) are recruited by privately owned enterprises with limited state or political interference. Collectively, the findings imply that relevant skillset (knowledge and expertise) alone is insufficient to discharge directors’ monitoring functions; the ability to work in a culturally sensitive manner and maintain a level of professional independence are equally necessary.