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Week 6 Reading The Shanxi Bankers (Morck And Yang, 2010) Notes

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EH207: Reading - The Shanxi Bankers (Morck and Yang, 2010)

Topic 6: Reading - The Shanxi Bankers (Morck and Yang, 2010) Introduction

Empire-wide branch networks Full array of services similar to Western banks Most argue a purely Chinese origin i.e. parallel economic evolution Others argue case of diffusion into Shanxi via Russia Unique dual class of equity, managerial incentives and contracting arrangements ensured confidence in their bank drafts o Mitigate very modern governance and agency problems

The Banks (Case Study: Sunrise Provident Bank)

Li Daquan founded the Rishenchang (Sunrise Provident Bank) in 1823 o After observing silver shipments passing each other in opposite directions o Saw business opportunity to replace the expensive security, wagons, and pack animals with a clearing house The first institutions to offer a full range of banking services Made Pingyao and nearby Qixian and Taigu counties into financial centers Grew rapidly from 1823 to early 1840s

Harmony in Equity

"During stable times, Confucian hierarchical principles and imperial edicts could enforce agreements" Law was an insiders' game of ritual formalism (Djankov et al. 2003; La Porta et al 2008) Descendants of merchants were barred from civil service exams for 3 generations Merchants were the lowest class in the Confucian caste hierarchy Therefore banks needed their own contract enforcement system Insiders with too few shares have insufficient incentive to maximize shareholder value - divergence of interests problem (Jensen and Meckling 1976) o Higher insider stakes improve governance
 Therefore some argue to compensate managers with stock or stock options (Jensen and Murphy 1990) Large insider equity ownership leads to entrenchment o Where if insiders or their heirs control enough votes they cannot be displaced even if that are unable to provide good management (Morck et al. 1998; Stulz 1988)

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