Ambiguous information and the demand for aggregation in accounting

This paper examines the value of aggregate accounting information. Summary financial reports play an important role in accounting; however, aggregate information is inherently less informative than disaggregate information. While prior research has shown that aggregate information can be valuable due to frictions such as agency costs, I show that aggregation can be valuable in a frictionless market that includes ambiguity averse investors.; Ambiguity aversion refers to a distaste for betting on uncertain probability distributions that require them to make a subjective assessment of odds. Much of economic theory assumes that investors are indifferent between bets that have known odds and bets that have unknown odds. Empirically, many people prefer bets that do not require them to make subjective guesses of the odds. This phenomenon is relevant to capital markets because the probabilities associated with payoffs from securities are subjective.; In a frictionless market that includes ambiguity averse investors, I show that ambiguity averse investors prefer aggregate information because it depends less on subjective guesses about probability distributions. This in turn causes aggregate information to increase the participation of ambiguity averse investors in the stock market and reduce equity premia. The aggregation schemes that minimize equity premia tend to deemphasize ambiguous information, reflecting a tradeoff between informativeness and subjectivity. There is no such tradeoff when investors are not ambiguity averse. I also show that ambiguity averse investors may optimally choose to ignore new information.