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Accounting Information, Aggregation, and Discriminant Analysis


  • Anil Arya

    (Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210)

  • John Fellingham

    (Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210)

  • Doug Schroeder

    (Fisher College of Business, The Ohio State University, 2100 Neil Avenue, Columbus, Ohio 43210)


Aggregation is a pervasive theme in accounting. The preparation of financial statements involves extensive aggregation---information regarding several transactions is summarized using a few account balances. In this article, we study linear, double-entry aggregation rules. The level of aggregation (transactions versus account balance information) affects a decision maker's ability to discriminate between two entities. We show that the orientation of the discriminant function relative to the row space and the nullspace (two fundamental subspaces) of the double-entry matrix determines the information loss due to aggregation. In addition, we observe that an interdependency in account balances is introduced by the double-entry process. The cause and effect property (debit and credit) translates into a negative covariance being introduced among account balances; this, in turn, affects the decision maker's optimal use of information. Finally, in discussing benefits to aggregation, we present an example in which adopting a double-entry aggregation rule serves as a commitment device for the owner.

Suggested Citation

  • Anil Arya & John Fellingham & Doug Schroeder, 2000. "Accounting Information, Aggregation, and Discriminant Analysis," Management Science, INFORMS, vol. 46(6), pages 790-806, June.
  • Handle: RePEc:inm:ormnsc:v:46:y:2000:i:6:p:790-806

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    References listed on IDEAS

    1. Anil Arya & Jonathan Glover & K. Sivaramakrishnan., "undated". "The Interaction between Decision and Control Problems and the Value of Information," Corporate Finance & Organizations _016, Ohio State University.
    2. Sappington, David E. M., 1986. "Commitment to regulatory bureaucracy," Information Economics and Policy, Elsevier, vol. 2(4), pages 243-258, December.
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    Cited by:

    1. Anil Arya & John Fellingham & Doug Schroeder & Jonathan Glover, 2002. "Depreciation in a model of probabilistic investment," European Accounting Review, Taylor & Francis Journals, vol. 11(4), pages 681-697.


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