5 changed dramatically and past performance measures can be poor guides to future performance. Nevertheless, firms in the Czech Republic do report quite complete information and accounting data on profitability have improved considerably since the onset of the transition. Especially in the last year of our sample, profitability can be expected to reflect some of the effects of ownership structures on corporate governance. Stock market data also have some weaknesses. While the stock market is reasonably active in the Czech Republic and the firms selected for this paper are the most liquidly traded, liquidity is clearly lower than in market-economies. Furthermore, there is much block-trading off-the-exchange, often at prices different from those on the exchange. The prices at the exchange may then be more a reflection of the valuation of firms by minority shareholders, and not necessarily incorporate the value of control. While both profitability and market valuation of firms can be expected to reflect the influence of ownership patterns, each will have some advantages and disadvantages.

For testing these relationships, we follow the approaches of Morck, Shleifer and Vishny (1988, MSV from now on) and McConnell and Servaes (1990, MS from now on). MSV and MS investigate, for samples of 371 and about 1000 US firms respectively, the cross-sectional relationship between ownership (by management and institutional investors) and Tobin's Q and profitability. Tobin's Q is defined as the ratio of the market value of a firm-value of equity, i.e., number of shares times the secondary market price, plus the market value of its debt-to the replacement value of the net fixed assets of the firm; profitability is defined as the ratio of the inflation corrected deprecation cash-flow to the replacement value of fixed assets. The higher the Tobin's Q, the more valuable the firm is considered as a going concern and the more value the market thus attributes to the ability of management to generate profits from its assets. The link between the level of profitability and the quality of corporate governance is obvious. It is likely to be very imprecise, however: many other factors can affect a given year's profitability, and there can be considerable lags between changes in corporate governance and changes in profitability. We would thus expect the relationship between ownership structure and Tobin's Q to be stronger than that between ownership structure and profitability. MSV and MS concentrate on ownership by management and institutional investors. We broaden the ownership (concentration) focus by also using the measures introduced by Demsetz and Lehn (1985) in their study of links between ownership structures and profitability. As control variables, MSV and MS use leverage (ratio of long-term debt to assets), R&D expenditures (as a ratio to assets), advertising expenditures (as a ratio to assets), and industry dummies.

Higher valuation and profitability, however, may not only be due to greater ownership concentration, but also to signaling and special abilities of certain owners. Some investors may be more able to evaluate firms-based on their better information-and their ownership may serve as a signal to other investors and thus be associated with higher profitability and higher valuation. This effect is less likely prevalent in the Czech Republic as the auction rules limited any investors with better (inside) knowledge from establishing large ownership. And, as in other countries, any excessive bidding by investors with inside knowledge in the secondary market would presumably lead to higher prices, but not necessarily to ownership by the investor with inside knowledge. While (inside) information may thus have been revealed-through the bidding process or in the secondary market-it is not necessarily associated with ownership by particular investors. Some