The Influence of Local Government Size, Regional Original Income, and Balancing Funds on Local Government Financial Performance in North Sumatra Province

Abstract

This research is motivated by the suboptimal management of assets and Regional Original Income (PAD) and the high dependence of local governments on transfer funds from the central government, which has an impact on the declining financial performance of local governments in North Sumatra Province. This study aims to analyze the influence of local government size, PAD, and balancing funds on local government financial performance using agency theory as the basis for analysis.

            The study population covered 33 districts/cities in North Sumatra Province during the 2020–2023 period using a saturated sampling technique. The data used in this study were collected through documentation . Data analysis was performed using multiple linear regression analysis. The results of the study show that the size of the regional government and PAD have a positive effect on the financial performance of the regional government, while the balancing fund has no significant effect.

            These findings support agency theory, which states that differing interests between the central government (principal) and regional governments (agents) influence financial performance. Dependence on transfer funds creates potential inefficiencies and reduces regional governments' motivation to increase fiscal independence. Conversely, increased local revenue (PAD) and larger organizational scales strengthen the accountability and effectiveness of regional financial management.

Keywords: Regional Government Financial Performance, Regional Government Size, Local Original Income, Balancing Funds, Agency Theory