The Effect of Local Own-Source Revenue and Capital Expenditure on Local Government Financial Performance: The Moderating Role of Financial Reporting Quality

Indonesian local governments have expanded own-source revenue and capital budgets and mostly earn favorable audit opinions, yet their expenditure-to-revenue ratios remain near or above 100 percent. Prior studies report conflicting effects of revenue and capital spending and rarely test whether financial reporting quality conditions them. This study examines how own-source revenue and capital expenditure affect local government financial performance and whether reporting quality moderates these effects, drawing on fiscal decentralization, agency, and stewardship theories. We analyzed a balanced panel of 15 regencies and municipalities in Lampung Province from 2018 to 2024 (105 observations) using pooled regression with moderated regression analysis. Own-source revenue significantly raises the expenditure-to-revenue ratio (coefficient 15.07, p = 0.006), showing that revenue growth without discipline expands spending rather than efficiency. Capital expenditure and audit-based reporting quality have no significant direct effects at the 5 percent level. Reporting quality is a pure moderator: its negative interaction with revenue (coefficient −4.06, p = 0.007) reverses the marginal effect of revenue from +2.90 under qualified opinions to −1.15 under unqualified opinions. Audit compliance therefore disciplines spending only when revenue expands. It does not moderate capital expenditure, and the model explains only 8.2 percent of variance, so the results are conditional rather than general. The study contributes by modeling reporting quality as an institutional boundary condition in fiscal decentralization and by separating compliance from efficiency. Policymakers should pair revenue mobilization with expenditure controls and use audited statements for budget monitoring rather than as compliance targets.