Company age and investment returns
What does age have to do with stock performance?
Published April 25 2024
At first blush, one might think a company’s age is more or less irrelevant to the decision whether to buy or sell a security. Yet the evidence points to real relationships between age and performance. Academic research has examined the topic1,2; these insights together with our investment experience yield several pieces of information that can be put to work within a quantitative investment program.
What are the effects of company age?
We have found that age matters significantly in interaction with other factors in the context of decision-tree analysis. Simply put, certain factors are more important for younger companies (e.g., price and analyst-based sentiment) and other factors are more important for older companies (value and quality measures).
Consider a group of stocks with high 1-year returns. First, the algorithm asks the company’s age. If it’s older, the next question is about value; if it’s younger, the query focuses on analyst-based sentiment. The age factor is meaningful enough that successive questions for young and old companies are very different. We have found that including it into our investment process significantly improves the forecasting accuracy of our alpha model and the simulated returns of our model backtests.
Age is a somewhat fluid and subjective concept. For instance, is a company that has gone through bankruptcy new or old? If a startup merges with a SPAC, does the business’s age date back to the merger or to the IPO of the SPAC vehicle? Protocols must be developed for such cases, and our judgement may diverge from the information listed in standard databases.
Considered in isolation, age may not be a useful tool to pick stocks, but when incorporated into a decision-tree framework, its use can significantly improve forecasting accuracy and, potentially, lead to higher returns.
1Guo, Danqiao, et. al. “Age matters,” MPRA Paper 93653, University Library of Munich, Germany, 2019.
2Zhang, X. Frank. “Information Uncertainty and Stock Returns,” available on Social Science Research Network (SSRN), 2004.