Determinants of Local Government Financial Performance in Indonesia

Regional autonomy is expected to promote financial performance and people’s welfare. This study investigates factors that affect local governments’ financial performance in Indonesia, where performance is defined as the ability to generate local revenues. To test our hypothesis, we used panel data regression analysis. From 2012 to 2019, this study collected 3,747 observations on municipal governments. The dependent variable is local government financial performance, while the independent variables include region size, capital spending, financial reporting quality, audit recommendations, and the horizon problem. We find that the size of the local government, financial reporting quality, and the follow-up on audit recommendations positively affect financial performance. Larger local governments have more resources to generate revenues. High financial reporting quality and accountability are supposed to improve public trust and increase their willingness to make contributions through local tax payments. Capital expenditure, on the other hand, is associated with lower financial performance. This study contributes to the literature on financial performance, especially in the public sector, by providing empirical evidence on factors affecting local government financial performance. This study provides insight to stakeholders by providing evidence on the role of size, capital spending, audit opinion, and follow-up of audit recommendations in accelerating the improvement of financial performance.