# Ownership and Corporate Governance: Evidence from the Czech Republic

Corporate governance has received much attention in the context of the transition of centrally-planned economies to market economies. The need for more effective corporate governance of firms in these countries is obvious. How to achieve it has been more controversial. Various schemes for privatizing state enterprises and allocating property rights have been put forward and tried. The Czech mass privatization program was implemented through a voucher scheme with a distribution of points to citizens followed by competitive bidding. It was a bold step at changing the ownership and governance of a large part of the economy. Within a short period, about 70 percent of the Czech economy was in private hands. As such, the Czech program represents a clear test case of one approach to changing corporate governance, an approach which has likely contributed much to the superior record of the Czech Republic in enterprise restructuring relative to other transition economies.

At the time of initiating the program, much skepticism was voiced about mass privatization. Particularly, while mass privatization would imply ownership by outside investors, it could lead to diffuse ownership and poor corporate governance. Investment funds emerged, however, which collected much of the individuals' vouchers, leading to more concentrated ownership. The expectation has been that this more concentrated ownership will lead to improved corporate governance. To date, however, only anecdotal evidence is available on the impact of owners on the way firms are managed. The paper also aims to shed light on crosscountly analyses which shows that Czech firms are restructuring more rapidly than firms in other transition economies (Pohl et al., 1996). One aspect which differentiates the Czech model from other countries' is in the clear ownership structure-as a result of the mass privatization program-and the large influence on firms of institutional investors-as a result of the concenitrated ownership and the use of other control mechanisms, including _defacto_ proxy voting.

To investigate this question directly and indirectly, we study whether firms which ended up with more concentrated ownership have higher profitability and trade for higher ratios of market to replacement value. If more concentrated ownership leads to better corporate governance, one would expect profitability and valuation to be increasing in ownership concentration. The link with profitability would be direct; the link with valuation would be indirect since in a forward-looking market, prices will incorporate the effect of better ownership on future firm performance. In market economies, where this is a much studied topic, these relationships are quite strong.

This paper relates therefore various indicators of ownership concentration to the valuation and profitability of a cross-section of firms over the period 1992-1995. For firm valuation we use Tobin's Q, which is the ratio of the market value to the accounting (i.e., replacement) value of the firm. It is measured as the market value of equity plus the face value of debt relative to the book value of net fixed assets and inventory. Controlling for some firm specific-variables, we find that several measures of ownership concentration are positively related to Tobin's Q and profitability. Qs and profitability are also higher when bank-sponsored funds have large ownership. We also find that Qs and profitability are higher when an investment fund sponsored by a firm's main bank