Governance structure, organizational form, and business performance: A study of the Shanxi <i>piaohao</i> (banks), 1820s–1930s

This paper studies Shanxi piaohao, China’s first and largest private remittance banking group, established by a group of merchants from Shanxi province. Drawing on extensive primary sources, our study offers the first empirical analysis of the piaohao’s business organization and performance. We show that piaohao thrived but were also constrained by their own private rules. In their earlier development, they successfully overcame the commitment problem by implementing a townsmen-guarantor-based recruitment system, a centralized M-form structure, and a multilateral punishment mechanism. To align the interests of shareholders and employees, they created employment shareholders and offered a competitive compensation scheme. However, piaohao’s governance structure became obsolete as shareholders increasingly failed to monitor head managers in its later period. A drastic increase in business volume and a changing business climate also exposed the defects of a centralized structure. As modern Chinese banks rose to prominence, the piaohao were gradually outcompeted and declined.