We study under which circumstances firms choose to install boards and their roles in a historical setting in which neither boards nor their duties are mandated by law. Boards arise in firms with large, heterogeneous shareholder bases. We propose that an important role of boards is to mediate between heterogeneous shareholders with divergent interests. Voting restrictions are common and ensure that boards are representative and not captured by large blockholders. Boards are given significant powers to both mediate and monitor management, and these roles are intrinsically linked.

We compare activism and takeovers from the perspective of a blockholder who can provide effort to improve firm value. We show that free-riding behavior by dispersed shareholders has the following implications: First, activism can be more profitable than a hostile takeover even if it is less efficient. Second, activism is most efficient when it brokers, rather than substitutes for, takeovers. Third, such takeover activism earns superior returns. More broadly, our theory implies that activists specialize in governance reforms with limited, temporary ownership being a strength rather than a shortcoming of activism.

We study the structure of public firm buyouts in a model that features the Berle-Means problem (lack of incentives) and the Grossman-Hart problem (holdout). We find that bootstrapping, debt in excess of funding needs, and upfront fees to bidders are socially optimal and increase buyout premiums. These elements make LBO financing tantamount to a “management contract” arranged by an outside manager to receive cash and incentives to manage a firm—except the cash is funded by excess debt imposed on the firm. Our model also rationalizes why PE firms collect fees from their equity partnerships and directly from target firms.

We relate trade credit to product characteristics and aspects of bank-rm relationships and document three main empirical regularities. First, the use of trade credit is associated with the nature of the transacted good. In particular, suppliers of dierentiated products and services have larger accounts receivable than suppliers of standardized goods and rms buying more services receive cheaper trade credit for longer periods. Second, rms receiving trade credit secure nancing from relatively uninformed banks. Third, a majority of the rms in our sample appears to receive trade credit at low cost.