Capital Asset Pricing Model Adjusted for Anchoring

I show that adjusting CAPM for anchoring provides a unified explanation for the size, value, and momentum effects. Anchoring adjusted CAPM (ACAPM) predicts that stock splits are associated with positive abnormal returns and an increase in return volatility, whereas the reverse stock-splits are associated with negative abnormal returns and a fall in return volatility. Existing empirical evidence strongly supports these predictions. Anchoring has the effect of pushing up the equity premium, a finding which is relevant for the equity premium puzzle.