The Effect of Local Own-Source Revenue and Capital Expenditure on the Financial Performance of Local Governments: The Moderating Role of Financial Statement Quality

Abstract

This study aims to examine the effect of Local Own-Source Revenue and Capital Expenditure on the financial performance of local governments, with Financial Statement Quality as a moderating variable. The study is motivated by the inconsistency of previous research findings regarding the relationship between fiscal capacity, budget allocation, and local government financial performance. In the context of Lampung Province, disparities in fiscal capacity among regencies and cities indicate that higher local revenue and capital expenditure do not always directly lead to better financial performance. Therefore, financial statement quality is considered an important accountability mechanism that may strengthen or weaken this relationship. This research uses a quantitative approach with secondary data obtained from local government financial reports and related official documents. The unit of analysis is regency and city governments in Lampung Province during the 2018–2024 period. The data will be analyzed using panel data regression and moderated regression analysis to test both direct and moderating effects. The independent variables are Local Own-Source Revenue and Capital Expenditure, the dependent variable is Local Government Financial Performance, and the moderating variable is Financial Statement Quality. This study is expected to contribute to public sector accounting literature, particularly in explaining the role of financial reporting quality in strengthening fiscal accountability and improving local government financial performance.