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.
We consider a particular theory of investment (known to economists as Tobin's q), but the crux of the argument is that stock market prices serve as a signal to firms' managers to buy new investment goods.
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.
In addition, our source of replacement cost data is superior to that used in most studies which use Tobin's Q. The following sections of this paper discuss the data collection process and the methodology.
We conclude that, on average, the marginal and average Tobin's Q ratios differ for firms in the sample.
 Chirinko, Robert S., 1986, "Investment, Tobin's Q, and Multiple Capital Inputs," NBER Working Paper Series 2033 (October), 1-27.
We use Tobin's q, the ratio of the market value of the firm to its replacement value, to measure the extent of a firm's growth options and flexibility to respond to new conditions.(6) Tobin's q increases as more of a firm's value is due to growth options, i.e., as the firm has increased flexibility in choosing its future path.
The other essential data observations needed for our hypotheses tests are the Tobin's q and market share of industry revenue data.
First, we divide the rival firms into two subsamples according to whether their Tobin's q is greater than or less than the announcing firm's q ratio.