Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

Verification of Asymmetric Cost Behavior in Merged Local PublicEnterprises
Shohei Nagasawa
Graduate School of Social Sciences, Department of Business Administration
Tokyo Metropolitan University, Japan
Japanese Association of Management Accounting, Japanese Cost Accounting Association, and Japanese Accounting Association
E-mail: nagasawa-shohei@ed.tmu.ac.jp
Abstract
In this study, the author verifies how the cost behavior of Japanese local public enterpriseschanges before and after municipal amalgamations, and also clarifies the effect of the amalgamation of municipalities on their cost management. While it is expected that merged public organizations acquire advantages (i.e., synergy effects and economies of scale) through expanding
the organization size and increasing management resources, these factors affect resource adjustment costs upon the amalgamations, which influence cost behavior. In order to confirm theeffect of amalgamations on resource adjustment costs, the author analyzes a panel of 17,049
financial data points from 1999 to 2013 and finds that sticky costs were strengthened after municipal amalgamation. Thus, the administrative capability of resource adjustment declined after
municipal amalgamations. The results of this study do not suggest that synergy effects or scaleadvantages arise in post-merged local public enterprises. These results may be due to three main
factors: the possibility that expanding the organization size may increase the inefficiency of thefunctional organizational structure; the growing scale of management resources may increase
committed capacity costs; and the institutional restriction, that public service must be provided
even if unprofitable, may be affected from the viewpoint of public interest as a specific problemof public organization.
Keywords
Local public enterprises, Amalgamation, Sticky costs, Anti-sticky costs, Adjustment costs(1) Introduction

tors, such as changes in the external environ-This study examines how public organiza-

ment, and management decisions. For thistion administrators manage their costs

reason, it is important to understand cost be-through municipal amalgamations with a fo-

havior when managing costs. In traditional

cus on the change in cost behavior as astudies on cost behavior, changes in cost andmethod for verifying cost management.

activity levels are explained in a linear andCost behavior is affected by a variety of fac-symmetric function. Also, in terms of cost19

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

classification, costs consist of fixed and varia-

and acquisitions (M&A) (Jang et al. 2016).

ble costs. However, the capacity costs-related

M&A is expected to bring the economies ofstudies have a different perspective fromscale effect of gaining a competitive ad-

their traditional counterparts. They also con-vantage by acquiring the capabilities of thefirm that a non-linear relationship appears

external organization and converting them tobetween costs, which includes the adjustment

internal resources (Vermeulen and Barkema,of management resources and activity levels

2001). Synergy effects may also be contem-(Anderson et al., 2003). In other words, anplated with the acquisition of the manage-

asymmetric cost behavior appears between

ment resources and capacity of the other com-an increase and decrease in activity. Ander-

pany following a merger (Capron, 1999; Grae-son et al. (2003) coined the term “sticky costs”

bner et al., 2010).

(or “cost stickiness”) for the phenomenon in

However, few cases of mergers exhibit thewhich the cost reduction rate when activity

expected effect (King et al., 2004). After afalls is smaller than the cost increase rate

merger, the improvement of financial indica-when activity rises. These studies look at

tors is confirmed in the short term, but a neg-changes in cost behavior from the perspective

ative effect on innovation is reported then theof capacity costs, including changes in man-new organization cannot achieve the compet-

agement resources (Noreen and Soderstrom,

itiveness of long-term companies (Hitt et al.,1997).

1991). In the research on empirical cost be-

One of the factors that cause sticky costs ishavior, Sepasi and Hassani (2015) pointed out

the influence of resource adjustment costs

that sticky costs are strengthened in the case(e.g., Anderson et al., 2003; Banker et al.,of both large organization size and large scale

2013; Günther et al., 2014). Resource adjust-of management resources, rather than small

ment costs are generated when management

ones. Therefore, the firm size is one of theresources are adjusted to match the activity

things that can affect cost stickiness. In thelevel. Günther et al. 2014 organized and de-case of M&A, Jang et al. (2016) indicated that

scribed the relationship between holding

the association between cost stickiness andcosts and adjustment costs based on the priorsynergies could be a negative effect. Espe-

cost stickiness literature. In terms of human

cially, the scale of tangible assets also affects

resources, for example, when activity in-sticky costs more negatively after mergers.

creases, the costs of hiring and training new

In general, municipal amalgamations are

employees are incurred; conversely, dismiss-also expected to provide the benefits of scale

ing employees involves compensation costs,

and synergy effects. Furthermore, it issuch as retirement allowances according to le-thought that municipal amalgamations cangal requirements. In terms of material re-provide efficient and effective public services.

sources, for example, when the facilities or

From this point of view, the verification of theequipment are integrated by mergers, these

efficiency of services and the effect of fiscal re-events may incur disposal expenses, reloca-

duction has been carried out in the fields oftion expenses, and repair expenses.

public finance and public economics. The var-

One of the greatest fluctuations in timing ofious studies in these fields can be categorizedmanagement resources is an event of mergers

according to three claims: those that find20

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

amalgamation effects, those that do not findmanagement due to municipal amalgama-

amalgamation effects, and those that explain

tions.

that the effect is limited. In other words, these

The article proceeds as follows. Section 2

studies have not reached a conclusion on

discusses the characteristics of LPEs and thewhether the amalgamations of municipalities

effect of municipal amalgamations. Section 3

are effective or not.

presents a review of the literature on public

Therefore, in this study, the author intends

organization cost behavior and develops theto verify the effects of municipal amalgama-

research hypotheses. Section 4 describes thetions focusing on cost behavior, namely,

research methodology, including the sample

whether the administrators in merged munic-

data, the variable measures, and the models.

ipalities manage their costs to improve effi-

Section 5 presents and discusses the results.

ciency or effectiveness from the viewpoint of

Finally, Section 6 concludes with a discussion

cost management in comparison with pre-of the limitations of this study and sugges-

amalgamation costs. At the same time, ittions for future research.

means to clarify how the cost behavior fluctuates due to resource adjustment costs changes(2) Characteristics of LPEs and Effects of Mu-

by amalgamations.

nicipal Amalgamations

As the research subject, this study focuses

1. Characteristics of LPEs

on local public enterprises (LPEs) in Japan as

LPEs in Japan deal with functions, such as

representative municipalities. Since LPEs

the water supply, industrial water supply,

adopt the same accounting methods as for-sewer, automobile transportation, railways,

profit enterprises, they are suitable for ana-electricity, gas, and hospitals, and each mu-

lyzing public organizations using existing em-

nicipality deals independently with its own

pirical research methods for cost behavior.

businesses. These services can be provided

Furthermore, the management of LPEs is

not only by LPEs, but also by commercial en-

also integrated as part of municipal amal-

terprises. However, before starting such busi-

gamations. Under LPE law, LPEs are consid-

nesses, government approval and authoriza-

ered a part of municipal organizations. How-tion are required, since these services are crit-ever, from the viewpoint of business manage-ical necessities for living. In other words,

ment, the mayors generally give management

LPEs provide public goods and services based

authority to the LPEs’ administrators so thaton public interest and operate mainly in thethey can manage their LPEs independently

areas where commercial enterprises do not dofrom municipalities. LPEs generally provide

business because they are not profitable orservices, such as water services, and receive

they need to large investment (Oshima, 1971).

service charges. Therefore the LPE adminis-

The organizational forms of LPEs have

trators have to manage based only on theirsome unique characteristics. Since a LPE isservice charges without depending on taxes

an internal bureau of a municipal organiza-

from municipalities.

tion, it is not completely independent from a

Therefore, by analyzing LPEs, it is possible

municipality under the law. However, LPEs

to understand not only public organizations’have their own business administrators apartcost behavior, but also the changes in cost21

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

from the mayors who are the heads of the mu-

Hence, the material resources of a LPE might

nicipalities. Therefore, administrators man-mainly consist of high committed capacity

age LPE businesses independently from mu-costs. Furthermore, a LPE may be in charge

nicipalities. This business system is intendedof social infrastructure facilities, such as

to allow LPE administrators to make quick

dams and piping for the water supply or roll-and flexible cost management decisions sinceing stocks and rails for transportation, which

their services should be provided efficiently

require large-scale equipment. Thus, given

and effectively (Kawarata, 2005). Additionally,

these ratios, one of the problems for LPE

LPEs’ settlements and budgets are also sepa-

management is a low fixed asset turnoverrate from those of municipalities. Thus, LPEs

rate1. Therefore, LPE administrators shouldhave to continue to provide stable services tomanage in the direction of reducing the idle

residents based only on the service charges

capacity in material resources in order towithout depending on taxes from municipali-manage their LPEs more efficiently. They also

ties. On the other hand, LPEs are not fully in-have to reduce their equipment repair or

dependent from municipalities because themaintenance costs.

management of the LPE administrator must

Finally, it is important to understand the

be monitored by the local parliament and thefeatures of human resources in the context ofmayor to ensure that the public services are

LPEs. LPE employees are guaranteed almost

provided safely and continuously. For thisthe same status as that of public officers. By

reason, LPE administrators cannot make im-law, LPE administrators must continue toportant management decisions on their own

employ their workers. For this reason, even if

but rather must get approval from the mayors

the business situation deteriorates, the dis-and local parliament. In other words, themissal of LPE employees is difficult for LPE

mayor and councilors who are elected as rep-administrators. Even after municipal amal-

resentatives oversee the state of LPE man-gamations, LPE administrators are obliged toagement. LPE administrators have their own

continue the employment of both their own

stakeholders, and their main purpose is toemployees and the employees of the merged

maintain their businesses efficiently and ef-

LPE. Thus, LPE human resources have a

fectively; they are different from commercial

high committed capacity cost and a low man-enterprises, whose main objective is the max-

aged capacity cost.

imization of profit (Eldenburg et al., 2004;
Holzhacker et al., 2015).

2. Effects of Municipal Amalgamations

Next, since this study focuses on resource

In Japan, since 1999 and with a peak inadjustment costs, it is important to under-

2004, many amalgamations have been con-stand the features of LPE management re-ducted among municipalities. As a result, thesources. Among LPEs’ material resources, thenumber of municipalities decreased fromratio of fixed assets to net assets and that of

3,232 organizations in 1999 to 1,719 organiza-

fixed assets to equity capital are both high.
1rate is 0.11% (Local Public Enterprise Yearbook No.

The fixed asset component ratio is 91.6%, thefixed ratio is 146.7%, and the fixed asset turnover

61).

22

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

tions in 2013. Since LPEs are one of the inter-

effects of municipal amalgamations appeared

nal divisions of municipalities, they were also

in the expansion of the financial scale, the re-integrated as part of municipal amalgama-

duction of service costs, and improvements intions. The number of LPEs decreased fromthe quality of service. However, academic

11,712 businesses in 1999 to 8,703 businesses

studies in the field of public economics, public

in 20132.

administration, and public finance argue for

The nationwide increase in municipal

various opinions regarding the effects of mu-

amalgamations occurred for three reasons:nicipal amalgamations, and their evidences

the pressure for efficiency improvements

are mixed (Liner, 1992; Edwards and Xiao,

caused by the long-term downturn of the Jap-

2009; Drew et al., 2017). These studies mainly

anese economy, the influence of the popula-focus on the correlation between municipaltion decline and the expansion of the depopu-

amalgamations and municipal expenditures.

lated area, and the requirement of effective

So far, no previous studies have focused on

and high-quality public services. First, thechanges in cost management due to munici-

long-term downturn of the Japanese economy

pal amalgamations. In other words, thiscaused the deterioration of the financial sta-

study is the first to verify the effects of munic-

tus of municipalities. For this reason, small-

ipal amalgamations from the viewpoint of theand medium-sized municipalities had to

management accounting field.

strengthen their financial basis throughamalgamations; specifically, municipal amal-(3) Prior Research and Development of Hy-

gamations aimed to achieve economies ofpothesesscale. Second, due to the expansion of the de-In recent years, empirical research on cost

populated area, demand for public services

behavior has focused on capacity costs. Inchanged significantly. In other words, in order

other words, researchers are focusing on costto secure profitability, municipalities had tofluctuations, including changes in manage-

provide services to wider areas. Thus, amal-

ment resources (Banker and Byzalov, 2014).

gamations also aimed to achieve economies ofAnderson et al. (2003) clarify that the rela-size. Finally, municipalities were expected totionship between costs and activities is notshare knowledge through amalgamations andproportional or linear, and they call this phe-enhance synergy effects. Moreover, when mu-

nomenon sticky costs. Resource adjustment

nicipal amalgamations were carried out, sub-costs are one of the factors that cause sticky

sidies from the Japanese government in-costs. For example, the costs of human re-creased, which created incentives for stake-source development, such as training costs or

holders in municipalities.

the costs for dismissal compensation, need to

The Japanese government reported the ef-

be adjusted depending on the activity level.

fectiveness of municipal amalgamations in

Similarly, in the case of material resources,

2008 and 2010. These reports stated that themaintenance costs or repair costs for facilities

There are several reasons why the rate of decrease in the number of municipalities due tothe amalgamation differs from the rate of decrease in the number of local public enterprises.

One of the major reasons is that some local public enterprises started their operations after theamalgamation of municipalities.

223

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

or equipment need to be adjusted according tolarge organizations have to get agreement

the increase or decrease in the activity level.

from many stakeholders before making cost

In situations where resource adjustments

management decisions. In other words, re-must be made in accordance with changes insource adjustment costs are greater for large

activities, adjustment costs, as represented byorganizations than they are for small ones. In

agency costs, are generated.

the case of M&A, sticky costs also increase af-

These studies on cost fluctuations mainly

ter the amalgamations, since resource adjust-target commercial companies and exclude

ment costs are increased by amalgamations

public services, such as utilities, since the au-(Jang et al., 2016).

thors argue that public services adopt a differ-Thus, first of all, I focus on the change inent accounting system (Shust and Weiss,organization size. When the organization2014), and that cost behavior analysis models

scale is expanded due to an amalgamation,

only apply to competitive business fields andLPE administrators should have more diffi-

not to public service fields (Weiss, 2010). For

culty adjusting to their management re-this reason, only a few studies focus on public

sources. In the case of merging LPEs, because

organizations. However, these studies insist

the scale of the organization becomes larger

that there is evidence of asymmetric cost be-after the amalgamation, the sticky costs

havior among public organizations (Yasukata

should be stronger after an amalgamation

et al. 2011; Bradbury and Scott, 2014; Cohen

than they are before an amalgamation.

et al., 2014; Holzhacker et al., 2015). Bradbury and Scott (2014) analyze the cost behav-

Hypothesis 1: Sticky costs after amalgama-ior of New Zealand municipalities, Cohen ettion are stronger than before in merged local

al. (2014) focus on Greek municipalities, andpublic enterprises.

Holzhacker et al. (2015) target German hospitals. These studies also find evidence of sticky

The merging LPE should provide more ef-

costs in public organizations, and they argue

fective and efficiency through an improve-that sticky costs originate from the mission ofment in its management resources with the

public interest. In other words, public organi-passage of time after the amalgamation. How-zation administrators are pressured by insti-

ever, amalgamations have the expected effecttutional constraints and have to serve con-in few cases (King et al., 2004). After an amal-

stantly even if doing so causes a reduction in

gamation, the improvement of financial indi-revenue. Thus, sticky costs are strengthened

cators is generally confirmed in the shortamong public organizations (Holzhacker et al.,term, but amalgamations may negatively in-2015). Since LPEs in Japan are also public or-

fluence innovation, and companies cannot ac-

ganizations, my prediction is that sticky costs

quire a competitive advantage in the long

will strongly appear for merged LPEs.

term (Hitt et al., 1991). There is concern that

Furthermore, Sepasi and Hassani (2015)

an amalgamation makes it difficult to makeclarify that sticky costs are stronger for large

long-term adjustments to cost management.

organizations than for smaller organizations,and they argue that organization size affects

Hypothesis H2: Sticky costs increase ascost management. Specifically, managers oftime passes after an amalgamation.
24

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

Next, as management resources are consol-

costs or the number of staff as a proxy for hu-

idated and eliminated by the amalgamations,

man resources (Anderson et al., 2003; Banker

the author needs to consider the impact of re-et al., 2013). One reason for these high sticky

source adjustment costs on cost behavior.

costs is worker protection laws. Namely,

Dalla Via and Perego (2014), and Sepasi andworker protection laws require managers to

Hassani (2015) describe the relationship be-retain human resources even when sales de-tween the scale of the organization and thecrease since they cannot dismiss employeeschange in resource adjustment costs, andeasily in order to protect workers. Therefore,clarify the evidence of stronger sticky costs onhuman resources adjustment costs act to in-larger organizations than on smaller organi-crease sticky costs (Banker et al., 2013). Thus,

zations. One factor in highly sticky costs insticky costs strengthen as the scale of an or-

large organizations is committed capacity cost.

ganization expands, since adjusting to human

The larger scale of the organization creates

resources costs becomes more difficult forless flexibility in adjusting to material re-

managers (Sepasi and Hassani, 2015).

source costs and human resource costs.

In the case of LPEs, worker protection laws

Therefore, when management resources arealso make it difficult for management to dis-greater, the committed capacity cost increases,

miss employees easily. If the LPE administra-and managers have more difficulty in flexibly

tors dismiss employees, then there are still

adjusting to material resources or human re-huge resource adjustment costs, such as ansources costs. In addition, Jang et al. (2016)

increase in compensation costs or the prolon-

focus on the M&A of enterprises and clarify

gation of adjustment by litigation. For thisthat the sticky costs will also increase for en-

reason, amalgamations of LPEs may increase

terprises with a large scale of material re-the committed capacity cost of human re-sources. LPEs should integrate their facilities

sources, so LPE administrators will likely loseand equipment through amalgamations, so

the flexibility of cost adjustment.

the scale of material resources should expand.
Therefore, as material resources increase, re-Hypothesis H4: The influence of the scale ofsource adjustment costs increase, and sticky

human resources may affect cost behavior bycosts are strengthened.

strengthening sticky costs as compared withthose before the amalgamation.

Hypothesis H3: The influence of the scale ofmaterial resources may affect cost behavior(4) Research Methodby strengthening sticky costs as compared

1. Sample Selection

with those before the amalgamation.

To verify these hypotheses, I run a panel
data analysis. The analysis period begins in

Next, I examine the influence on the costfiscal year 1999, when municipal amalgama-

behavior accompanying the adjustment of hu-

tions started, and ends in fiscal year 2013,

man resources. Prior researches confirm thatgiving a time period of fifteen years.

human resources adjustment costs act toAnalytical samples were collected from thestrengthen sticky costs by using the labor"Local Public Enterprise Yearbook" edited by25

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

the Local Public Finance Bureau of the Min-

LPEs’ operating expenses are substituted

istry of Internal Affairs and Communications.

for Cost (hereafter “C” in the models). Addi-

This yearbook lists the financial data for eighttionally, Revenue takes operating revenue

industries (i.e., the water supply, industrial(hereafter “R” in the models) as a proxy for thewater supply, transportation, gas, hospital,

activity amount. Decrease_Dummy (hereaf-

sewerage, marketing, and parking lot busi-

ter “Dec_D” in the models) is a dummy varia-

nesses) for each municipality. The financial

ble that takes the value of 1 when operating

data used for the analysis are classified as per

revenue decreases between the t period andyear, municipality, and service. Additionally,

the previous period, and 0 otherwise. All thedata from each profit and loss statement anddata are natural logarithms (“ln” in the mod-balance sheet were used. Also, operating rev-els).

enue, operating expenses, total assets, and la-Using this model, it can be confirmed thatbor costs were used as proxy indices for activ-

when operating revenue increases by 1%, theity amount, cost, material resources, and hu-

cost changes by the value indicated by β1. Ad-

man resources, respectively.

ditionally, because of the Decrease Dummy,

The collected data represent 17,471 firm-

when operating revenue decreases by 1%, theyears. To control for the effect of outliers, I de-cost decreases by β1 + β2, whereas β2 indi-lete the top and bottom 1% of observations.

cates the value of the sticky or anti-sticky

The final sample data includes data forcosts. Therefore, when there is cost stickiness,

17,049 firm-years. Therefore, the panel dataβ2 will be negative, and when cost stickinessis unbalanced. Looking at the breakdown of

is not present (anti-sticky costs), β2 will be

the sample data, the sample of pre-merger

positive. If the sticky costs are strengthened

LPEs includes 7,888 data points, and 9,161

after the amalgamation, β1>β1+β2 should

data points post-merger.

hold true.
In order to verify hypothesis 2, it is neces-

2. Method of Analysis

sary to capture the changes in cost behavior

Anderson et al. (2003) develop the empiricaldue to the passage of time after amalgama-

research method of cost behavior based on ations. Holzhacker et al. (2015) adopt a time

Cobb-Douglas type cost function. They also

trend dummy to reflect changes over time, soclarify asymmetric cost behavior using their

the same method is used in this analysis.

models. This model has been adopted in many

Model II

subsequent studies (Banker and Byzalov,2014). Therefore, hypothesis 1 of this studylnwill also be examined with this model.

Model I
ln

,

,

=

+

∗ ln

+

∗

∗ ln
,

,

_

,

+

,

,

,

=

+

∗ ln

∗

_

∗

,

∗ ln

,

+
26

,

_
,

,
,

,

∗ ln
∗

,

+

+
,

,

∗

_

+

_

,

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

In this model, time_trend is 1 in the year of

post-amalgamated LPEs respectively. Eachthe amalgamation and increases by 1 in therow includes data on cost (operating ex-

subsequent years. The use of the time trend

penses), revenue (operating revenue), total

can show the change in the degree of sticky

assets, labor costs, and the natural loga-

costs over time. The other variables are therithms of each of these items. The revenue, to-same as in model I.

tal assets, and labor costs include 0 yen as the

Next, in order to verify hypotheses 3 and 4,

minimum value, which means that the sam-total assets are used as a proxy for material

ple includes financial data for the periods ofresources, and labor costs are used as a proxypreparation for start-up and preparation forfor human resources. Therefore, the author

discontinuance. Some studies exclude suchverifies the effect on cost behavior using

data points, but in this study, the author in-

Model III.

cludes them in the analysis3, taking into consideration the influence of survival bias when

Model IIIln,,they are excluded.
=

+

∗

∗ ln

_

,

,

∗ ln

,

Based on the descriptive statistics, there+,

are three notable characteristics of the data
for the whole sample. First is that the operat-,

ing balances of the LPEs are not in deficit on
average, which confirms the soundness of the

+

, ,

+

, ,

∗

LPEs’ financial conditions. Second is that thescale of the total assets is large on average.
LPEs mainly operate in the field of living in-

_

,

∗ ln

,

,

frastructure businesses, such as water supply
and transportation, so they require a large+

scale of facilities. Third, the differences can il,lustrate between LPEs before and after merging sample. After amalgamations, each de-Resources represent total assets divided byscriptive statistic increases.

operating revenue and labor costs divided by

The descriptive statistics as a whole do not

operating revenue, respectively. The otherindicate any serious defect points that would

variables are the same as in model I.

affect the subsequent data analysis.

(5) Analysis Result
1. Descriptive Statistics
Table 1 shows the descriptive statistics. The
first rows are the total sample, the secondrows are the sample of pre-amalgamatedLPEs, and the third rows are the sample of3

For robustness check, similar results were ob-tained when analyzing excluding 0 yen sample.

27

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

Table 1. Descriptive statistics(*Scale: 1,000Yen)

Cost*
2,024,249
Revenue*
2,134,425
Assets*
19,209,685
Labor costs*
653,136
Total
ln C t/C t-1
0.0073ln R t/R t-1
0.0043ln A t/R t
2.1570ln L t/R t-1.6390
Cost*
1,494,557
Revenue*
1,617,380
Assets*13,024,617
BeforeLabor costs*
506,584
amalgaln C t/C t-1
0.0049mationln R t/R t-1
0.0046ln A t/R t
1.9983ln L t/R t-1.5987
Cost*
2,480,336
Revenue*
2,579,622
Assets*
24,535,284
After
Labor costs*
779,323
amalgaln C t/C t-1
0.0094mationln R t/R t-1
0.0041ln A t/R t
2.2940ln L t/R t-1.6748

Standard
Lower
Upper
Minimum
MedianMaximum Number
deviationquartilequartile
4,015,146
896
199,571569,507 1,828,052
49,143,211
4,409,089
0
208,549
596,456 1,921,935
53,791,218
65,935,863
77 2,011,582 4,824,222 13,375,953 1,026,677,522
1,482,8020
32,00588,453
469,751
19,582,768
17,0490.0824-0.4951-0.0265
0.00350.03440.50150.0749-0.5630-0.0221-0.00120.0236
0.55671.2003-4.4576
1.48752.28472.7311
10.46860.8651-9.4928-2.1810-1.7226-0.9029
4.8141
3,380,642
1,677
153,665
333,526 1,087,361
33,444,824
3,863,543
0
175,802377,021 1,166,930
53,791,218
57,061,789
25,770 1,557,399 3,028,554 6,946,847
959,833,266
1,217,538
0
29,38857,420330,520
18,609,940
7,888
0.0832-0.4829-0.03120.00230.03620.49940.0716-0.5331-0.0219-0.00020.02430.55671.0481-1.2580
1.55402.18252.57097.24560.7529-6.7757-2.0658-1.6674-1.11411.37494,440,046
896
301,784
848,920 2,461,973
49,143,211
4,785,358
0
288,278
848,640 2,519,457
47,581,762
72,294,581
77 3,172,107 7,801,138 18,753,095 1,026,677,522
1,667,716
038,454
129,653
652,896
19,582,768
9,161
0.0816-0.4951-0.02270.00430.03280.50150.0777-0.5630-0.0223-0.00190.02280.5522
1.3023-4.4576
1.34062.36962.9307
10.4686
0.9526-9.4928-2.3051-1.7783-0.7692
4.8141

2. The results of analysis

revenue decreases 1%, then costs are de-Mean

In the panel data analysis, three models

creased 0.6788%.

were used for verification: the pooled model,

Thus, costs changes ratio when revenue in-

the fixed effect model, and the random effectcreases are larger than 1 when revenue de-model. Then, the author conducts a Hausman

creases (i.e., anti-sticky costs). Meanwhile, in

test to confirm the result of the most effective

the samples after the amalgamation, β1 ismodel. The results of these analyses using

0.6746 and β1+β2 are 0.3380, which indicatesmodels from I to III are shown in Tables 2 tothe occurrence of sticky costs. Therefore, costs

4, respectively.

changes ratio when revenue increases are

Beginning with the confirmation of thesmaller than 1 when revenue decreases (i.e.,analysis results of model I in Table 2, thesticky costs). These analysis results suggest

Hausman test indicate that the most effectivethat the cost adjustment capabilities de-model before the amalgamation is the randomcreased after the amalgamation, which sup-effect model, while after the amalgamation,

ports hypothesis 1.

the fixed-effect model is most effective. In thesamples before the amalgamation, β1 is
0.5117 and β1+β2 are 0.6788. This resultshows that when revenue increases 1%, thencosts are increased 0.5177%, conversely the28

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

Table 2. The before / after cost behavior re-Table 3. The results of time trend tests using

sults using Model I

Model II

Beforeamalgamation

β00.0058

***

5.50

β1

0.51170.16710.67460.0039β1

0.6019-0.3366

***

49.29

***

β2

-0.0238
-0.91

44.35
***

***

3.90

0.0000***

5.58-12.49Adj.R

0.25150.2711

N

7,882

9,128

DW

2.20552.3959

H-Testp-value

0.68270.0000Model

Random effect

Fixed effect

2

β0

0.02
***

30.33

β2

After
amalgamation

β3-0.0006

**

-2.27

β4

-0.0381

***

-7.82
2

0.2431

Adj.R
N
DW

17,010

H-Testp-value0.0037

Model

Fixed effects

2.4361For β0, β1, β2, β3, and β4, the upper value is thecoefficient estimate and the lower value is thet-statistic, *significant at the 10% level, **significant at the 5% level, ***significant at the
1% level, N=Number of observations, Adj.R2 =Adjusted R2, DW = Durbin-Watson ratio, HTest = Hausman Test.

For β0, β1, and β2, the upper value is the coefficient estimate and the lower value is the tstatistic, *significant at the 10% level, **significant at the 5% level, ***significant at the
1% level, N=Number of observations, Adj.R2 =Adjusted R2, DW = Durbin-Watson ratio, HTest = Hausman Test.

Next, the author verifies whether resource
adjustment costs with expanding manage-

Next, the author confirms the change inment resources due to the amalgamations af-

post-amalgamation cost behavior. The analy-

fect the amalgamated LPEs’ cost behavior us-

sis results are shown in Table 3. Changes ining Model III. The results are shown in Table

sticky costs over time can be confirmed by β44.

and it indicates a negative value of -0.0381.

The author performs a panel data analysis

Thus, sticky costs are strengthened as timeon the samples before and after the amalgam-

passes following amalgamations, supporting

ation, and this analysis shows that the fixed

hypothesis 2.

effect model is supported both before and after the amalgamation.
Regarding hypothesis 3, the influence of total assets is verified in terms of β5. The negative value of -0.0641 before the amalgamation
increased to -0.1328 afterwards. This result

29

Journal of Japanese Management Vo.3, No.2, May 2019

reveals that the influence of material re-

ISSN 2189-9592(6) Conclusion

sources on sticky costs strengthened after the

In this study, the author examines how theamalgamation, which supports hypothesis 3.

cost behavior of Japanese local public enter-

Lastly, regarding hypothesis 4, the influ-

prises changes before and after municipalence of human resources is indicated by β6.

amalgamations, focusing on the relationshipThe negative value of -0.2253 before the amal-

between amalgamations and resource adjust-gamation decreases to -0.0809 afterwards,

ment costs as a factor in asymmetric cost be-which confirms that the influence of humanhavior.

resources on sticky costs weakens after theThis study finds some interesting results

amalgamation. Therefore, hypothesis 4 is not

through the comparison between pre- andsupported.

post-amalgamation. First, sticky costs are revealed in the sample of post-merging LPEs.

Table 4. The influence of total assets and la-Hence, amalgamations tended to strengthen

bor costs using Model III

sticky costs on average. Second, it is clarified

Beforeamalgamation

β00.02161.26

β10.5180β2

0.0603

***

23.57
1.08

After
amalgamationthat the post-amalgamation sticky cost is af-

0.0590***sources. Third, on the contrary, the influence

0.7214***-0.1566

***

5.51

48.50

β4

0.05500.0331***β5-0.0641***-0.1328***β6-0.2253***-0.0809

***

-2.76

2

Adj.R

N

DW

-7.21
0.22557,776
2.6022author supposes that these results are inmanagement resources.

***

9.88

ens the post-amalgamation cost behavior. The
duced from two aspects; organization size and0.0373

5.22

of human resources adjustment costs weak-

-4.43

***

β3

fected by the adjustment costs of material re--0.0011

-0.29

10.23
-9.92

First, I argue that it is difficult to makequick cost management decisions when thesize of an organization increases due to anamalgamation because of the inefficiency of
the functional organizational structure andthe influence of the specific approval system-4.09
0.33688,722
2.4313

H-Testp-value

0.00000.0000Model

Fixed effect

Fixed effect(i.e., the “Ringi” system) in Japanese organizations. In public organizations, including
LPEs, a functional organizational system isadopted. Then, as the organization scale expands, job divisions are subdivided and become more specialized. The middle-bottom-up

For β0 to β6, the upper value is the coeffi-

type of decision-making is usually adopted incient estimate and the lower value is the t-sta-

Japan rather than top down decision-making

tistic, *significant at the 10% level, **signifi-(Ala and Cordeiro, 1999). For this reason, it iscant at the 5% level, ***significant at the 1%

necessary to form a consensus among depart-

Adj.R2 =ments for cost management decision-making,

Adjusted R2, DW = Durbin-Watson ratio, H-

which means that it takes a long time to make

Test = Hausman Test.

decisions (Martinsons and Davison, 2007).

level, N=Number of observations,30

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

Therefore, coordination of each opinion

flexibly maintain their cost adjustment capa-

among departments becomes more compli-

bilities in the case of human resources. In

cated. In some cases, there is a possibility that

other words, the LPEs managed to cover theiropinions may conflict among departments,

cost adjustment ability in human resources inand, then, agency costs can also arise. As theorder to compensate for the decline in theirresult of amalgamations, the size of an organ-

cost adjustment ability for material resources.

ization also grows; the author conjectures

One of the reasons for the analysis results isthat, for the cost management of LPEs, deci-

the reduction in recruiting regular staff andsion-making slows and flexible resource ad-instead adopting a large number of non-regu-

justment becomes more difficult after amal-

lar staff to restructure the administration 4 .

gamations.

Although dismissal of regular recruitment isSecondly, the author argues that the ad-

restricted, the author supposes that at thejustment costs of management resources duetime of employee retirement, they are con-to municipal amalgamations will have a neg-verting to hire non- regular staff. As the result,ative impact on cost management. As the re-administrators could be decrease the adjust-sult of amalgamations, with the integration ofment costs of human resources and may be

management resources, subsequent resource

able to maintain the flexibility of cost adjust-adjustment becomes more difficult than it is

ment.

before the amalgamation.

In future research, regarding with organi-

Especially, material resources acted tozation size, it is necessary to verify the rela-strengthen sticky costs after an amalgama-tionship between sticky costs and the internaltion. This result may be due to the inability to(in-corporating) effect of the functional organ-

abolish facilities or equipment because LPEs

ization system using empirical method. Re-

cannot discontinue utility service even if it isgarding with management resources, more

inefficient or unprofitable; i.e., the responsi-

detailed analysis according to the characteris-bility to support people’s everyday lives. In

tics of management resources is required toother words, in the case of material resources,

identify factors that affect sticky costs. Fur-municipal amalgamations increase the com-thermore, it is necessary to analyze consider-mitted capacity costs for LPEs’ cost manage-

ing different business environments for eachment.

industry of LPEs. There is a continuing need

Conversely, regarding human resources,

for detailed investigations of and research on

the analysis yielded results which were sur-public organizations’ asymmetric cost behav-

prisingly the opposite of the hypothesis.

ior, especially that of LPEs.

Namely, the human resource influence on the

There is a continuing need for detailed in-sticky costs tends to be weakened after amal-

vestigations of and research on amalgamatedgamation. LPE administrators manage to

LPEs’ asymmetric cost behavior.

4

Ministry of Internal Affairs and Communications,

The number of non-regular employees increased

from 456,000 in 2005 to 599,000 in 2012 according

Japan.

to “The report on temporary and part-time employees of local public officials” (Dec. 27, 2016), by the31

Journal of Japanese Management Vo.3, No.2, May 2019ISSN 2189-9592

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(Received: July 31, 2018)(Accepted: April 15, 2019)33