The purpose of this paper is to explain the impact of real factors and inflation on the performance of the U.S. stock market over the years 1960 to 1980. First, a general model of share valuation under inflation will be developed, one that recognizes the presence of debt, retention, personal and corporate taxes, and the tax and information consequences of inflation. Secondly, the model will be used to evaluate the influence on share value of plausible values for (1) the tax consequences of inflation, (2) the misinformation consequences of inflation, (3) changes in profitability, and (4) changes in the yield investors require on shares. Finally, the model will be employed to explain the actual change in the ratio of market value to replacement cost, q, for the common equity of the domestic operations of all nonfinancial corporations over the twenty years. Our findings may be summarized as follows. First, although inflation increases the tax burden on corporations, that only explains--in theory and in fact--a negligible fraction of the decline in the value of q. Secondly, if nothing else changed over the period 1960 to 1980 but the inflation rate, the two errors in valuing shares that M-C attributed to investors would account for an even larger fall in q than actually took place. Finally, our data showed that q fell between 1960 and 1980 because corporate profitability declined and because a rise took place in the yield (gross of the personal income tax and net of the inflation rate) that investors require on shares. One possible explanation for the rise in the required yield is that advanced by Feldstein--inflation and the capital gains tax combined to reduce the after-tax return on shares, while the required return remained unchanged. However, various other reasons appear to be no less reasonable, including the F-H finding that risk increases with inflation. Of course, whether the causality went from inflation to both profitability and required yield, or v... [ABSTRACT FROM AUTHOR]