THE INFLUENCE OF FINANCIAL GOVERNANCE ON FINANCIAL PERFORMANCE OF CITY/REGENCY GOVERNMENTS IN CENTRAL JAVA 2021-2025

Abstract

Fiscal dependency in Indonesia remains high, as central government transfers continue to dominate regional development funding. Central Java is the province with the lowest level of financial independence on the island of Java, signaling an urgent need for an evaluation of financial governance. This study aims to examine the effects of local revenue, capital expenditure, and budget surplus on local government financial performance, with Gross Regional Domestic Product (GRDP) serving as a control variable. Utilizing secondary data from 2021 to 2025, the study employs panel data regression methods using the FEM, REM, and CEM models. The results indicate that local revenue has a positive effect on financial performance, while capital expenditure, budget surplus, and GRDP have a negative effect on financial performance. The implications of this study emphasize the need for policymakers in Central Java to restructure capital expenditure to be more productive and to intensify local revenue collection. Furthermore, local governments must evaluate cash management strategies to minimize excessive budget surpluses, ensuring efficient budget absorption to strengthen sustainable regional financial capacity.