The Influence of Regional Government Size, Local Original Revenue, and Balancing Funds on the Financial Performance of Regency/City Regional Governments in North Sumatra Province for the 2020-2023 Period

Abstract

This study is motivated by the suboptimal management of regional assets and locally generated revenue (PAD), as well as the high dependence of local governments on transfer funds from the central government, which has led to a decline in the financial performance of local governments in North Sumatra Province.This study aims to analyze the effect of local government size, PAD, and balancing funds on the financial performance of local governments using agency theory as the analytical framework. The population of this study includes 33 regencies/cities in North Sumatra Province during the 2020–2023 period, with a saturated sampling technique applied. The data used in this study was collected by documentation. Data were analyzed using multiple linear regression analysis. The results indicate that local government size and PAD have a positive effect on the financial performance of local governments, while balancing funds have no significant effect. These findings support agency theory, which suggests that differences in interests between the central government (principal) and local governments (agents) influence financial performance. Dependence on transfer funds creates potential inefficiency and reduces the motivation of local governments to improve fiscal independence. Conversely, higher PAD and larger organizational scale strengthen accountability and the effectiveness of regional financial management