4 of each firm in each round.<sup>5</sup> The aim of the sequential bidding rounds was to reflect in the final prices the information gathering and analysis by individuals and institutions as well as any private and inside information. At the same time, the restrictions on sales limited the effects of inside information on final ownership.

# **II. Relationships between Corporate Governance and Firm Performance and Firm Valuation**

The influence of the distribution of and changes in ownership on corporate governance and firm performance and valuation has been much studied in market economies (Shleifer and Vishny, 1997, survey the literature). A common implication of many models of corporate governance is that firms with more concentrated ownership structures, but otherwise identical, have higher profitability and are valued higher as there is a greater incentive on the part of owners to monitor the firm and make the necessary changes in management. One way to test this implication is to study actual firm performance, changes in its management, and other measures, and relate this to (changes in) ownership. For market-economies, this approach has been used by, among others, Demsetz and Lehn (1985), Megginson et al. (1994), Denis and Denis (1995), and L6pez-de-Silanes (1996). A complementary approach is to use the valuation of a firm by the market. In a forward-looking market, prices of firms can be expected to incorporate the effects of ownership and corporate governance on future performance. This approach has also been used in market economies. Levy (1983), Lease et al. (1984), and DeAngelo and DeAngelo (1985), for example, find positive relationships between stock prices and voting power for U.S. firms. Zingales (1994 and 1995) studies the relationship between the premium attributed to voting rights and ownership structures for firms at the Milan stock exchange and in the U.S.. Morck, Shleifer and Vishny (1988) provide evidence of an inverse U-shaped relationship between ownership by managers and a firm's valuation and its profitability. McConnell and Servaes (1990) confirm this and provide in addition evidence of a positive relationship between institutional ownership and a firm's valuation and its profitability. For the Czech and Slovak Republics, Claessens (1997) finds a positive relationship between concentrated ownership and voucher and secondary market prices.

We pursue both approaches in this paper as we consider them complementary. Using performance and other accounting data alone to test effect of changes in corporate governance is difficult in formerly centrally planned economies. Data are of poorer quality as new accounting standards are introduced. Furthermore, since the demise of central planning, relative prices have 5. For the first round, prices (points per share) were set identically for all firms. If demand matched the supply of shares of particular firm at that price, all shares of that firm were sold in that round. If a firm's shares were undersubscribed, those that bid received shares at that price and the remaining shares were offered in the next round. When there was modest excess demand (less than 25% excess supply), citizens were given priority over investment funds and the demand of investment funds was scaled down to clear the market. With more than 25% excess demand, however, no shares were sold and all shares were to offered again in the next round at a new price which was set at (approximately) the previous price times the ratio of demand to supply. In some individual cases, prices were adjusted differently by the authorities (see Shafik 1995 for further details and some examples).