The Shanxi Banks

Randall Morck and Fan Yang

No 15884, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The remote inland province of Shanxi was late Qing dynasty China's paramount banking center. Its remoteness and China's almost complete isolation from foreign influence at the time lead historians to posit a Chinese invention of modern banking. However, Shanxi merchants ran a tea trade north into Siberia, travelled to Moscow and St. Petersburg, and may well have observed Western banking there. Nonetheless, the Shanxi banks were unique. Their dual class shares let owners vote only on insiders' retention and compensation every three or four years. Insiders shares had the same dividend plus votes in meetings advising the general manager on lending or other business decisions, and were swapped upon death or retirement for a third inheritable non-voting equity class, dead shares, with a fixed expiry date. Augmented by contracts permitting the enslavement of insiders' wives and children, and their relative's services as hostages, these governance mechanisms prevented insider fraud and propelled the banks to empire-wide dominance. Modern civil libertarians might question some of these governance innovations, but others provide lessons to modern corporations, regulators, and lawmakers.

JEL-codes: G21 G3 N2 N25 O16 (search for similar items in EconPapers)
Date: 2010-04
New Economics Papers: this item is included in nep-ban and nep-his
Note: CF
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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