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We extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the firm's managers to know more than outside investors about the true state of the firm's current earnings. The extension endogenizes the dividend (and financing) announcement effects amply documented in recent research. But once trading of shares is admitted to the model along with asymmetric information, the familiar Fisherian criterion for optimal investment becomes time inconsistent: the market's belief that the firm is following the Fisher rule creates incentives to violate the rule.We show that an informationally consistent signalling equilibrium exists under asymmetric information and the trading of shares that restores the time consistency of investment policy, but leads in general to lower levels of investment than the optimum achievable under full information and/or no trading. Contractual provisions that change the information asymmetry or the possibility of profiting from it could eliminate both the time inconsistency and the inefficiency in investment policies, but these contractual provisions too are likely to involve dead-weight costs. Establishing which route or combination of routes serves in practice to maintain consistency remains for future research. THE STANDARD FINANCE

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have also been particularly helpful to me recently in clarifying the main issues.' My long-time friend and collaborator, Franco Modigliani, is absolved from any blame for the views to follow not because I think he would reject them, but because he has been absorbed in preparing his Presidential Address to the American Economic Association at this same Convention.This coincidence neatly symbolizes the contribution we tried to make in our first joint paper of nearly twenity years ago; namely to bring to bear on problems of corporate finance some of the standard tools of economics, especially the analysis of competitive market equilibrium. Prior to that time, the academic discussion in finance was focused primarily on the empirical issue of what the market really capitalized.2 Did the market capitalize a firm's dividends or its earnings or some weighted combination of the two? Did it capitalize net earnings or net operating earnings or something in between? The answers to these questions and to related questions about the behavior of interest rates were supposed to provide a basis for choosing an optimal capital structure for the firm in a framework analogous to the economist's model of discriminating monopsony.We came at the problem from the other direction by first trying to establish the propositions about valuation implied by the economist's basic working assumptions of rational behavior and perfect markets. And we were able to prove that when the full range of opportunities available to firms and investors under such conditions