SheepShaver emulates a PPC Mac that can run System 7.5.3 through MacOS 9.0.4 with an old world ROM file and MacOS 8.5 through 9.0.4 when you use a new world ROM file. A new world ROM file is preferable when using MacOS 8.5 through 9.0.4.
You must install the system in the emulated machine yourself. You can use a system install CD, but that must, of course, be one that installs an old system that is compatible with SheepShaver and with the ROM file that you use with SheepShaver.
Though distribution of system disk images is illegal, you can quite easily find such images on the internet. You can, for instance, find a SheepShaver compatible MacOS 9.0.4 install CD image on the Macintosh Garden site under Operating Systems. Make sure you choose the one that is explicitly advertised as being compatible with SheepShaver.
The SheepShaver for MacOSX setup guide has instructions for using a CD image instead of an actual CD in italics: http://www.emaculation.com/doku.php/she ... os_x_setup
Installing System 7.5.3 using the 19 part image that can be downloaded from Apple is a little more complicated. The procedure is similar to the procedure for setting up system 7.5.3 with BasiliskII for Mac OSX: http://www.emaculation.com/doku.php/bas ... _osx_setup