xxxvi The modificat ion is also made in macroeconomic f act or by adding t he inflat ion as a new
exogenous var iable because sever al resear ches for example; Hut agaol, 2002 and Nugroho, 2007 show t hat inf lat ion has effect s on local government original revenue. Local governm ent original
revenue is one of import ant component t hat composes financial per formance.
1. M acroeconomic factor
a. GRDP
GRDP m easur es t he w ealt h of local governm ent s. St at ist ics Bur eau of t he Republic of Indonesia or Badan Pusat St at ist ik BPS uses t hr ee approaches in m easuring GRDP, namely,
product ion approach, expendit ur e approach and income approach. Product ion approach expresses GRDP as t he t ot al value of final goods and ser vices
produced by all product ion unit s in a region w it hin a cer t ain period usually one year period. Product ion unit s are gr ouped as in t he Int ernat ional St andard Indust rial Classificat ion of All
Economic Act ivit ies ISIC, w hich are: Agr icult ure; M ining and Quarrying; M anufact uring Indust ries; Elect ricit y, Gas and Wat er Supply; Const ruct ion; Trade, Hot el and Rest aurant ;
Tr ansport and Comm unicat ion; Financial, Ow nership and Business Services; Ser vices including governm ent ser vices.
Expendit ur e approach expr esses GRDP as t he t ot al of final demand component s, covering t he consumpt ion expendit ur e of households and privat e nonprofit inst it ut ions, government
consumpt ion, gross dom est ic f ixed capit al format ion, increase in st ock and net export w it hin a cer t ain period. Net export is t he export minus import .
Incom e approach expresses GRDP as t he t ot al incom e by product ion fact ors engaged in t he product ion process in a r egion. The incom e com ponent s of t he product ion fact ors may t ake t he
xxxvii form of w ages or salar ies, land r ent , capit al int erest and profit margin. The profit s include income
t ax and ot her direct t axes. In t his definit ion, t he GRDP also cont ains depr eciat ion and net direct t axes.
In relat ion t o profit abilit y rat io, a local governm ent w it h high GRDP t ends t o enhance t he value of local government r evenue t hrough local governm ent original revenue and r evenue
sharing. This sit uat ion will enhance t he f iscal capacit y of local gover nment . The rise of fiscal capacit y w ill enhance t he possibilit y t o enhance budget surplus, cet eris paribus. The rise of local
governm ent revenue w ill also raise t he possibilit y t o enhance t he value of asset and equit y. Cohen 2008 f inds t hat profit abilit y rat io is influenced by GRDP. Thus, it is expect ed t hat GRDP w ill
influence t he profit abilit y rat io. Based on t he above discussion, t his research proposes t he f ollow ing hypot heses:
H1a: Ret urn on equit y ROE w ill be influenced by GRDP H1b: Ret urn on asset s ROA w ill be influenced by GRDP
H1c: Profit margin PM will be influenced by GRDP In r elat ion t o curr ent rat io, t he rise of local government revenue t ends t o enhance t he
capacit y of local governm ent t o cope w it h cash shor t age, cet eris paribus. Thus, t he bigger t he capacit y of local government t o cope w it h cash short age, t he low er t he possibilit y for local
governm ent t o use current liabilit y as t he financing inst rument . The rise of local governm ent revenue also t ends t o enhance t he value current asset , cet eris paribus. Cohen 2008 found t hat
GRDP has t he influence on curr ent rat io. Thus, it is expect ed t hat GRDP w ill influence t he curr ent rat io.
xxxviii Based on t he above discussion, t his research proposes t he f ollow ing hypot heses:
H1d: Current rat io CR w ill be influenced by GRDP In relat ion t o capit al st ruct ure rat io, t he r ise of local governm ent revenue t ends t o enhance
t he value of asset and equit y, cet eris paribus. If t he value of debt is const ant , GRDP w ill affect t he capit al st ruct ur e rat io negat ively. How ever, Cohen 2008 found t hat GRDP influences capit al
st ruct ur e rat io negat ively. This indicat es t hat local government s t hat have higher r evenue t ends t o use debt as t he financing inst rument .
Based on t he above discussion, t his research proposes t he f ollow ing hypot hesis: H1e: Debt t o equit y rat io D E will be influenced by GRDP
H1f: Long t erm debt t o t ot al asset s rat io L A will be influenced by GRDP In relat ion t o perfor mance rat io, GRDP t ends t o enhance t he value of local government
original revenue. The rise of local governm ent original revenue t ends t o enhance t he value of of perfor mance rat io, cet er is paribus. Cohen 2008 found t hat GRDP influences t he perfor mance
rat io. Thus, it is expect ed t hat GRDP w ill influence t he perf or mance rat io. Based on t he above discussion, t his research proposes t he f ollow ing hypot hesis:
H1g: Asset s t urnover rat io AT w ill be influenced by GRDP H1h: Local government original revenue t o t ot al r evenue rat io LORTOR w ill be influenced by
GRDP H1i: Local governm ent original revenue t o operat ing expense rat io LORPREX w ill be influenced
by GRDP
xxxix b.
Inflat ion Usually, inflat ion relat es t o a rise in t he general level of prices of goods and ser vices in an
econom y over a period of t ime. Inflat ion consist s of demand side inflat ion and cost pull inflat ion. Demand side inflat ion is usually follow ed by t he rise of GDP. Cost pull inflat ion is t he t ype of
inflat ion caused by t he rise of cost of product ion. Cost pull inflat ion is usually follow ed by t he decline of purchasing pow er.
In cont ext of local governm ent , Hut agaol 2003 conduct s t he research invest igat ing about fact ors influencing t he ent ert ainm ent t ax in DKI Jakart a and finds t hat inflat ion has effect on
ent ert ainment t ax revenue. Nugr oho 2007 invest igat es f act ors influencing pr opert y t ax r evenue in Klat en Regency and finds t hat inflat ion has negat ive impact on land propert y t ax revenue.
The influence of inflat ion on prof it abilit y rat io depends on t he t ype of inf lat ion. Demand side inflat ion is expect ed t o influence prof it abilit y rat i o posit ively because it is usually follow ed by
t he rise of GDP. As discussed in pr evious discussion, t he rise of GDP is expect ed t o influence profit abilit y rat io positively. On t he ot her hands, cost pull inflat ion is expect ed t o influence
profit abilit y rat io negat ively because it is usually follow ed by t he decline of purchasing pow er . The decline of purchasing pow er t ends t o decline t he local governm ent ’ s economic act ivit y. The
decline of economic act ivit y t ends t o reduce t he value of local governm ent r evenue. The decline of local governm ent revenue t ends t o decline t he budget surplus, equit y, and asset .
Based on t he above discussion, t his research proposes t he f ollow ing hypot heses: H2a: Ret ur n on equit y ROE w ill be influenced by inflat ion
H2b: Ret urn on asset s ROA w ill be influenced by inflat ion H2c: Profit margin PM w ill be influenced by inflat ion
xl The influence of inf lat ion on current rat io also depends on t he t ypes of inflat ion. Demand
side inf lat ion is expect ed t o have similar influence on current rat io as GDP. On t he ot her hands, t he cost pull inflat ion is expect ed t o have influence on current r at io negat ively because it t ends t o
reduce t he value of local governm ent r evenue. The decline of local governm ent r evenue t ends t o lead t he cash shor t age problem. The decline of local government r evenue also t ends t o r educe
t he value of current asset , cet eris paribus. Thus, cost pull inflat ion t ends t o influence t he curr en t rat io negat ively.
Based on t he above discussion, t his research proposes t he follow ing hypot heses: H2d: Current Rat io CR w ill be influenced by inf lat ion
In accordance w it h capit al st ruct ure rat io, t he demand side inflat ion is expect ed t o have influence similar t o GRDP. On t he ot her hands, t he cost pull inflat ion is expect ed t o negat ively
influence t he capit al st ruct ur e. The cost pull inflat ion t ends t o reduce local government r evenue. The decline of local governm ent r evenue t ends t o r educe t he value of asset and equit y. This
sit uat ion t ends t o push local governm ent t o choose debt as t he financing inst rument . Based on t he above discussion, t his research proposes t he follow ing hypot heses:
H2e: Debt t o equit y rat io D E w ill be influenced by inflat ion H2f: Long t erm debt t o t ot al asset s rat io L A will be influenced by inflat ion
The inf luence of inflat ion t o performance rat io w ill depend on t he t ype of inflat ion. As discussed in previous discussion, demand side rat io w ill have similar influence on performance
rat io as GDRP. On t he ot her hands, cost pull inflat ion is expect ed t o influence t he perfor mance rat io negat ively because it t ends t o r educe t o r educe t he local government original revenue.
xli Furt her , t he decline of local governm ent r evenue t ends t o aff ect t he value of t ot al revenue, asset
and operat ing expense. Based on t he above discussion, t his research proposes t he follow ing hypot heses:
H2g: Asset s t urnover rat io AT w ill be inf luenced by inflat ion H2h: Local government original revenue t o t ot al r evenue rat io LORTOR w ill be influenced by
inflat ion H2i: Local governm ent original revenue t o operat ing expense r at io LORPREX w ill be influenced
by inflat ion
2. Size
