I1 are not significant)."' A positive sign for leverage can be expected in the Q-regression as leverage increaLses the value of the tax-shield advantages derived from debt financing, thus increasing the relative value of a firm. Leverage may not, however, have a positive coefficient for the profitability regression since we use operating income as our profitability-measure, which is not influenced by the tax advantages of increased interest payments. Alternatively, for both the Q- and profitability-regression, leverage may have a negative coefficient as, according to some agency models, leverage can be negatively correlated with Q and profitability (see Harris and Raviv, 1991, for a review of the relationships between leverage, and Q and profitability).

We run the regressions in three steps. First with the Herfindahl index (or the top 5 investors) only; second with the Herfindahl index but also including the shares for the various categories of investors to investigate their individual roles; and finally-to investigate the role of banks-also including one dummy, which is one when an investment fund sponsored by a firm's main bank has an ownership stake of more than 10%. The explanatory power of the regressions is good, with R<sup>2</sup> s between 0.14 and 0.17 for the Tobin's Q regressions and between 0.08 and 0.10 for the profitability regressions. The lower R<sup>2</sup> s for the profitability regression likely reflect the fact that current year profit is a poor guide to future profitability and valuation. **12** Furthermore, the panel-regressions document not only the cross-section variation in the variables, but also their variation over time. Lower R<sup>2</sup> s could thus be expected. Annual cross-section regressions give R<sup>2</sup> s comparable to those obtained in similar cross-section regressions.<sup>13</sup> Leverage has a positive and significant coefficient for Tobin's Q. Leverage has, however, a negative coefficient for profitability. This may be because under central planning Czech firms financed their long-term investment needs differently from their working capital. Their subsequent corporatization, including the determination of the book value of equity, may have led to a negative association between high-leverage and initial profitability. The corporatization may have rneant, for example, that firms which received more investment loans ended up more leveraged. Since during the transition these high capital intensive firms were generally less profitable, a negative association between leverage and profitability could have arisen. The crosssection regression using 1995 data alone suggests that this may be the explanation as the coefficient for leverage in the profitability regression turns positive.

The result for the concentration variable is that the lower the dispersion of ownership (the higher H), the higher Tobin's Q and profitability (Table 2, regression i). Ownership by the top five investors, A5, has similarly a significantly positive influence on Tobin's Q and profitability (not 11. We tested the joint significance of sectors and year dummies in all regressions. The sector dummies are always jointly significant at the 99% level. The year dummies are jointly significant at the 99% level for all profitability regressions; they are jointly significant for Tobin's Q in Regression (i) at the 95% level, but turn insignificant in Regressions (ii) and (iii).

12. As noted, the correlation between Tobins Q and profitability goes up over time. In the year-by-year regressions, the R<sup>2</sup> s then also increase for the profitability regression.

13. For example, the R<sup>2</sup> s for the 1995-regressions (i) for Tobin's Q and profitability are respectively 0.335 and 0.228, comparable to those obtained by MSV, 0.595 and 0.429 given the poorer quality of data and weaker institutional setup in the Czech Republic compared to the U. S..