Mechanisms, markets, and monitors: A theory of endogenous choice of governance mechanisms in market equilibrium

We model a world where managerial opportunism can be countered by several
governance mechanisms: activist investors, the threat of asset redeployment, incentive compensation, or formal board monitoring. Firms choose combinations of
these mechanisms to develop their governance structures, and their choices affect
the equilibrium premium earned by activist capital. At the individual firm level,
opacity of the firm, the level of managerial diversion costs, and the premia required to compensate activist investors are among the factors that drive the choice of governance structure. These factors can have opposite effects on governance choices at the individual firm and aggregate levels, e.g., a reduction in the opacity of a single firm increases the likelihood of that firm adopting strong board governance, while a reduction in opacity throughout the economy can decrease aggregate adoption of strong board governance