Prudent youngsters, reckless oldies
In most countries, there is an important date in the calendar that has an outsized influence on success in life. It is the date that determines when children will go to school. For example, in many countries, children born before the 31st of December will start school in one year, while children born on the 1st of January or later will start school a year later. Similarly, when it comes to sports, the cut-off between different youth leagues is usually on the 1st of January.
The result of this cut-off point is that within every class or within a sports team at the youth level there are kids that differ in age up to one year (ok, 364 days for the bean counters out there). But because children can develop a lot within a year, this means that in youth sports, the children who are older relative to their teammates tend to be stronger and bigger and thus have an advantage in sports. The result is that children born in the first quarter of a year are overrepresented in elite sports teams and more likely to be identified as ‘talented’, gain additional support and thus develop faster and better than their peers. Hence, among professional athletes, there is an overrepresentation of people born early in the year.
Children who were born towards the other end of the cut-off period and are relatively younger, on the other hand are more likely to lack in self-esteem to the point where they are more likely to commit suicide.
In essence, the children born in the first quarter of a year get life handed on a silver platter, never have any problems, get all the pretty girls and become rich quickly. Meanwhile, people like me who are born in the last quarter of a year are struggling all the time, get bullied, never make a career, are unhappy and treated unfairly by life in general. Maybe I am overreacting…
Anyway, it seems that this relative age effect can also be found in business. In China, the cut-off date for school-age children is 1st of September. Children born before the 1st of September start school a year earlier than children born after that date. Throughout their childhood and youth, the relatively older children in a class tend to do better in sports which builds confidence to the degree that they may end up overconfident. For sure, they will end up more confident on average than their younger peers.
Once these kids enter business life that age benefit disappears. They no longer have the benefit of being slightly older and slightly more mature than their peers. But they do have the benefit of being more confident.
Fast forward a few years and they may end up running a business as the CEO. This is where Junru Guo and colleagues come in and look at some 2,500 CEO of some 1,000 listed Chinese companies. There is no relative age effect with CEOs in the sense that there is no overrepresentation of CEOs born in the first quarter of an academic year. But while there aren’t more CEOs who are born early in the year, the ones that are show all the signs of high confidence to the point of overconfidence. Companies managed by the oldest CEO by relative age have stock risk that is some 7% higher than companies managed by the youngest CEO by relative age. Relatively older CEO run businesses with higher leverage ratios, lower cash holdings and engage in risker M&A activity.
In essence, the older CEOs are more reckless, while the youngsters are more prudent. And as long as markets are going up, that’s a good thing for the oldies because the higher leverage translates into higher profitability of the company. But let the tide turn and the youngsters start to shine. Sometimes, being relatively younger can be a good thing. You just have to look for it.