Free riding, empire building, and cost management prior to and post municipal enterprise mergers in Japan

Shohei Nagasawa and Mizue Nagasawa

Asia-Pacific Journal of Accounting & Economics, 2021, vol. 28, issue 1, 94-116

Abstract: Opportunistic overspending tendencies induce inflexible cost adjustments and encourage bad cost stickiness. To examine whether this perspective applies to public sector organizations (PSOs) and mergers, we test the asymmetric cost behaviors, (1) free riding and (2) empire building, associated with managerial incentives in merged Japanese municipal enterprises. Consequently, we find evidence that prior to mergers, administrators’ opportunistic spending originating from free-riding behavior affects cost stickiness; conversely, an analysis of the post-merger sample shows that the empire-building incentive might partly mitigate sticky costs. Our results corroborate the contradictory role of managerial discretion in resource adjustment decisions between pre- and post-mergers.

Date: 2021
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DOI: 10.1080/16081625.2020.1845001

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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