Datar and Gottfried recently published a paper in the journal Educational Evaluation and Policy Analysis:
Datar and Goddfried did find gaps between students due to kindergarten entry age. These gaps are obtained after correcting for various other factors (demographics, school, teacher and classroom characteristics). The differences are quite significant at the start of schooling - kindergarten. The advantage of older children remains substantial at first grade, but diminishes with later years. In fact, at eight grade these gaps no longer exist. The following are the results of a 9-year long longitudinal study which followed about a thousand kindergarteners back in 1998.
Younger children are able to catch up. This study does not really answer when a child should start schooling. As time passes by, a year or a fraction of a year becomes less significant. What the above study clearly points out, however, is the inappropriateness of tracking, holding back, and diagnosing with learning difficulties at the early grades.