Financial distress of local government: A study on local government characteristics, infrastructure, and financial condition

Abstract

This study aims to obtain empirical evidence related to the effect of the variables such as local government characteristics, infrastructure, and local government financial condition to the financial distress of local governments in Indonesia. Population of this study is all local government that issue the financial statements audited by the Supreme Audit Agency (Badan Pemeriksa Keuangan Repulik Indonesia-BPK RI) in the period 2007 to 2009. The method of sampling is purposive sampling method producing 152 observations. Method of analysis is binary logistic regression. The results show that size (SZ), total program cost for assets (RPCTA), carrying value (CV), ratio of cash quickly (CQR), performance of government wealth (PERF), return on equity (ROE), profit margin (PM), and current liabilities (CL) significantly associate with probability of financial distress of local government. It implies that information presented in the financial statements of local governments in Indonesia has a predictive value, and, therefore is relevant tobe used in decision making.