We use ECLS-K data from a national sample of students to estimate the determinants and consequences of reading ability group placement in kindergarten and first grade. We find that prior test score performance is the strongest determinant of such placement, followed in magnitude by the teacher’s judgment of the student’s learning-related classroom behavior. These variables explain most of the ... [Show full abstract] race, gender, and social class differentials when students are placed into ability groups for the first time. Within kindergarten and first grade classes where grouping is used, placement into a higher group exerts a positive effect on student learning-related behavior and reading achievement. Ability group placement and the teacher’s assessment of student behavior both have significant effects on student’s growth in reading achievement, even net of their prior reading achievement scores. Such grouping takes individual and group-level performance differences that emerge during the preschool period and causes them to widen more than would otherwise be the case during the first 2 years of formal schooling.