Modern Financial Development during Natural Disasters : Evidence from Early 20th Century China

Using data for 375 droughts in 262 prefectures in China during 1906-1927, we show that drought-affected prefectures have more private bank inceptions than drought-free prefectures. This effect is more prominent among those with more private enterprises, suggesting that banks enter drought-affected regions to satisfy the financial demands from local businesses. In addition, the effect is greater in prefectures practising common law, with less political intervention and with greater social capital, consistent with recent literature that bank development depends on creditor rights protection. Our results remain robust when considering local socioeconomic conditions, foreign market exposure, and climate conditions in neighboring prefectures