This analysis tested the holding effect through the end of March of the following year for stocks that met both conditions: an upward revision to the full-year forecast at the second-quarter earnings announcement and share-price performance that outperformed TOPIX on all 3 days before and after the announcement.
This article introduces the “Double-Signal EAR Strategy,” which combines share-price movements before and after an earnings announcement with an improved earnings outlook. EAR is a measure of share-price reactions around an earnings announcement. The conventional approach is that a stock need only outperform the market over the 3-day period from the business day before the announcement through the following business day, and this serves as the starting point for stock selection.
The new strategy sets the stricter condition that the stock must outperform TOPIX on all 3 days: the business day before the announcement, the announcement day and the following business day. Specifically, the stock's daily return must exceed TOPIX's return on each day, and a stock is excluded if it underperforms TOPIX even once.
An upward revision to the full-year operating profit forecast is also added as evidence of improving performance. The strategy covers stocks for which both an upward revision at the time of the second-quarter earnings announcement and a 3-day rise in the share price are confirmed.
In a test covering the past 6 years, excess returns were calculated for stocks that met the conditions at the second-quarter earnings announcement, measured 1 month later, at year-end and through the end of March of the following year. Holding through the end of March of the following year produced positive returns in all 6 years, including a case that recorded a high excess return of 8.5% in the fiscal year ended March 2023.