Observers of the formerly communist economies urge firms there to obtain funds from a relatively few sources. They note the problems the firms face: dysfunctional courts, markets, and statutes. Because these firms cannot rely on the courts to discipline managers, they predict that firms will do...

Although observers urge transitional economies to rely on banks rather than stock markets, in early twentieth-century Japan, large firms did not rely on debt. Instead, they sold stock. To mitigate agency slack, they sometimes recruited prominent investors to their boards. In this context, we use...