liii The w eight ed least squar es t echnique in Gret l is conduct ed using het er oskedast icit y correct ed
t est .
Collinearit y: This t est is aim ed t o indicat e t he degr ee t o w hich each of t he explanat or y variables is collinear w it h t he ot her explanat or y var iables. When t his sit uat ion exist s, t he
model suf fer s mult icollinearit y problems. The good regr ession model must f r ee from t his problem. In Gret l, t his assumpt ion is checked by indicat ing variance inf lat ion fact ors VIF
value. When t he VIF is higher t han 10, t hen t he model suffers mult icollinearit y problem.
Normalit y: Nonnormalit y of errors oft en r equir ed by r egr ession model. In t he cont rary, ordinary least squar es OLS t echnique does not require t his assumpt ion Ramanat han, 1993.
As st at ed by Ramanat han 1993, t he most impor t ant t hing in OLS is t hat t he dat a is nonsingular t ype free of het eroskedast icit y and mult icollinearit y problems.
D. Variable Identification
This research is a replicat ion f rom Cohen 2008 w it h several modif icat ions. The main modificat ion in t his research is caused by t he dat a availabilit y. The price and t ourist as
invest igat ed by Cohen 2008 ar e unavailable. This research also modifies t he pr evious r esear ch by adding inflat ion t hat is expect ed t o have influence on f inancial rat ios.
The dependent variables ar e t he financial perfor mances t hat r epresent ed by f inancial rat ios w hich consist s of r et urn on equit y ROE, ret ur n on asset s ROA, profit margin PM , curr ent rat io
CR, debt t o equit y rat io D E, long-t er m liabilit ies t o t ot al asset s L A, asset s t urnover AT, local governm ent original revenue t o t ot al r evenue LORTOR and local government original revenue t o
t ot al expenses LOPRPREX and t he independent variables consist of macroeconomic fact ors t hat repr esent ed by gross regional domest ic product GRDP and inflat ion, size w hich represent ed by
t he num ber of inhabit ant s populat ion, and geographic variables t hat represent ed by island-
liv based locat ion of local governm ent s IBLOG and administ rat ive st at us of local governm ent
ASLOG.
E. Operational Definition
The dependent variables are classified int o four groups t hat consist of profit abilit y rat io, liquidit y rat io, capit al st ruct ure rat io and perfor mance rat io. Profit abilit y rat io consist s of ret ur n
on equit y, ret urn on asset s and pr ofit margin. Liquidit y rat io consist s of only current rat io. Capit al st ruct ur e rat io consist s of debt t o equit y rat io, and long-t er m liabilit ies t o t ot al asset s.
Perf ormance rat io consist s of asset s t urnover, operat i ng revenues t o t ot al r evenues and operat ing revenues t o t ot al expenses.
The operat ional definit ions for each dependent variable are summarized in f ollow ing t able:
Table 1 Ratio Calculation
Ratio Name Abbreviation
Calculation
Ret urn in Equit y ROE
Net Surplus Deficit Equit y Ret urn on Asset s
ROA Net Surplus Deficit Tot al Asset s
Profit M argin PM
Net Surplus Deficit M unicipal Original Revenue
Current Rat io CR
Current Asset s Current Liabilities Debt t o Equit y Rat io
D E Tot al Liabilit ies Equit y
Long Term Debt t o Tot al Asset s
L A Long Term Debt Tot al Asset s
lv Asset s Turnover
AT Local Government Original Revenue Tot al
Asset s Local government
original revenue Tot al
Revenue LORTOR
Local Government Original Revenue Tot al Revenue
Local government original
revenue Operat ing Expense
LORPREX Local Government Original
Revenue Operat ing Expenses
The independent variables consist of GRDP, inflat ion, populat ion, island-based locat ion of local governm ent s and administ rat ive st at us of local governm ent . The measur ement of GRDP in
t his research is based on curr ent price per capit a w w w .bps.go.id. The GRDP dat a per local governm ent ar e not available in Indonesian St at ist ics Bur eau. How ever, such informat ion is
available in t he province level. Thus, t his research w ill use t he GRDP of t he province t o w hich local governm ent belongs as a proxy for local governm ent ’s GRDP. The inflat ion dat a are also not
available in local government level. Thus, t his research uses t he inflat ion r at e of t he pr ovince w here local governm ent belongs as a proxy for local governm ent ’s inflat ion rat e. Populat ion is t he
populat ion in t he r egion. The dat a of populat ion is based on t he nat ional survey of BPS conduct ed in 2005. Island-based locat ion of local governm ent s and administ rat ive st at us of local
governm ent s ar e dum m y dat a in nat ur e. The measurem ent of such dat a is a cat egorical measur em ent .
lvi
CHAPTER IV DATA ANALYSIS
