Born Leaders: The Relative-Age Effect and Managerial Success

Abstract

This paper shows that the time of year of a person's birth is an important factor in the likelihood they become a CEO, and conditional on becoming a CEO, on the performance of the firms they manage. Based on a sample of 321 CEOs of S&P 500 companies from 1992 to 2006 we find that (1) the number of CEOs born in the summer is disproportionately small, and (2) firms with CEOs born in the summer have higher market valuation than firms headed by non-summer-born CEOs. Furthermore, an investment strategy that bought firms with CEOs born in the summer and sold firms with CEOs born in other seasons would have earned an abnormal return of 8.32 percent per year during the sample period. Our evidence is consistent with the so-called "relative-age effect" due to school admissions grouping together children with age differences up to one year, with summer-born children being younger than their non-summer-born classmates. The relative-age effect has been demonstrated in numerous sporting and other contexts to last to adulthood and to favor older children within a school grade. Those younger children who nevertheless succeed by overcoming their disadvantage have to be particularly capable within their cohort. Together, the advantage enjoyed by older children and the particularly high capability of successful young children explain the statistically and economically significant findings.

Keywords: Relative-age, CEO birthdate, corporate performance

JEL Classification: G30