Further, the market response is especially favorable for firms with overinvestment problems as measured by Tobin's q, and is not related to signaling costs as measured by the size of the repurchase.
In studying how investors interpret the reasons for the actual share repurchases, we follow Lang and Litzenberger (1989), who use Tobin's q to identify overinvesting firms.
We use two proxies, Tobin's q and the size of share repurchases, to distinguish between the free cash flow and the information-signaling hypotheses.
The story told by Tobin's q is, perhaps, overly stylized.
Nonetheless, the basic intuition underlying Tobin's q is compelling: Changes in stock prices should serve as a signal to firms' managers.
Tobin's q theory would suggest that the fall would occur the instant that firms' qs fall below one, but given the fact that many investment projects take several quarters to complete, the fall in investment would likely be somewhat more gradual.
In addition, our source of replacement cost data is superior to that used in most studies which use Tobin's Q.
We conclude that, on average, the marginal and average Tobin's Q ratios differ for firms in the sample.
6) Tobin's q increases as more of a firm's value is due to growth options, i.
The other essential data observations needed for our hypotheses tests are the Tobin's q and market share of industry revenue data.