xliii The bigger number of populat ion t ends t o enhance t he possibilit y of local governm ent in
using debt as t he f inancing inst rument , cet eris paribus. The bigger number of populat ion also t ends t o r educe t he value of asset and equit y, cet eris paribus. This argument aligns w it h Cohen
2008 w ho found t hat populat ion influences capit al st ruct ur e rat io posit ively. Thus, it is expect ed t hat t he populat ion w ill influence t he capit al st ruct ur e rat io.
Based on t he above discussion, t his research proposes t he follow ing hypot heses: H3e: Debt t o equit y rat io D E w ill be influenced by populat ion
H3f: Long t erm debt t o t ot al asset s rat io L A will be influenced by populat ion In accordance w it h performance rat io, bigger populat ion t ends t o enhance local
governm ent original r evenue, local governm ent t ot al revenue and operat ing expense. On t he cont rar y, bigger populat ion t ends t o r educe t he value of asset if t her e is no rise on local
governm ent r evenue. Cohen 2008 found t hat populat ion influences perfor mance rat io posit ively. Thus, populat ion is expect ed t o influence per formance rat io.
Based on t he above discussion, t his research proposes t he follow ing hypot heses: H3g: Asset s Turnover Rat io AT w ill be influenced by populat ion
H3h: Local gover nm ent original revenue t ot al revenue r at io LORTOR w ill be influenced by populat ion
H3i: Local government original revenue t o operat ing expense Rat io LORPREX w ill be influenced by populat ion
3. Geographical factor
a. Administ rat ive st at us of local governm ent s
xliv The dif f erent charact erist ics in local governm ent s i n Indonesia could also com e f rom
administ rat ive st at us differ ence of local governm ent s w hich divides local government s int o t w o administ rat ive st at uses; municipalit y and regency. According t o w w w .w ikipedia.com 2009, t he
differences bet w een municipalit y and r egency in Indonesia r eside on t hree point s; demographic charact erist ics, area size, and economic charact erist ics. Dat a r eleased by Indonesian St at ist ics
Bur eau BPS implies t hat municipalit y has larger populat ion densit y t han r egency in t er ms of dem ographic charact erist ic. M oreover, municipalit y has smaller area t han t he regency in t erms of
ar ea size. From t he economic charact erist ics, municipalit y t ends t o be t he cent er of indust r y and service provider, on t he ot her hand, regency t ends t o be provider in agricult ural sect or. The
differences bet w een municipalit y and regency, t hus, are similar t o differences bet w een rural and urban.
When discussing about t he relat ion bet w een rural and urban in Indonesian cont ext , t he discourse of disparit y also em er ges. Daryant o 2003 st at es t hat unsolved development problem
in Indonesia includes int err egional disparit y, t he high level of urban primacy, t he syner gy linkage bet w een rural and urban, underdeveloped r egions, and pover t y. It implies t hat several
developm ent problems in Indonesia involve t he disparit y bet w een rural and urban. The M inist ry of Underdeveloped Regions and The Accelerat ion of Indonesian East Region Developm ent in 2008
st at es t hat t here ar e 199 r egencies in Indonesia t hat classified as underdeveloped r egions. It means t hat none of t he municipalit y is classif ied as underdeveloped r egion.
In accordance w it h prof it abilit y rat io, municipalit ies as t he cent er of indust r y and service t end t o have mor e oppor t unit ies t o raise t he local government revenue t hrough local government
original revenue and revenue sharing compar ed t o r egencies. The rise of local gover nm ent
xlv revenue t ends t o enhance t he value of asset and equi t y, cet eris paribus. Thus, it is expect ed t hat
administ rat ive st at us of local governm ent w ill have influence on profit abilit y rat io. Based on t he discussion above, t his research proposes t he follow ing hypot hesis:
H4a: Ret urn on equit y ROE w ill be influenced by administ r at ive st at us of local governm ent H4b: Ret urn on asset s ROA w ill be influenced by administ rat ive st at us of local governm ent
H4c: Profit margin PM w ill be influenced by administ rat ive st at us of local government In accordance w it h curr ent rat io, municipalit y t ends t o have mor e opport unit ies t o
generat e r evenue compar ed t o regency. The rise of local government revenue t ends t o enhance t he value of curr ent asset , cet eris paribus. By assuming t hat t he value of curr ent asset is const ant ,
t he r ise of current asset is expect ed t o influence t he value of current rat io. Based on t he above discussion, t his research proposes t he foll ow ing hypot hesis:
H4d: Current rat io CR w ill be influenced by administ rat ive st at us of local government In accordance w it h capit al st ruct ure rat io, municipalit ies t end t o have m ore oppor t unit ies
t o enhance local gover nm ent revenue com pared t o regencies due t o t heir st at uses as indust r y and service providers. How ever, t heir st at uses as providers of indust ry and ser vice might push
t hem t o make mor e invest ment compar ed t o r egencies. This sit uat ion might urge t he local governm ent t o finance it using debt . Thus, it is expect ed t hat administ r at ive st at us of local
governm ent w ill have influence on capit al st r uct ure rat io. Based on t he above discussion, t his research proposes t he follow ing hypot heses:
H4e: Debt t o equit y rat io D E w ill be influenced by administ rat ive st at us of local governm ent
xlvi H4f: Long t er m debt t o t ot al asset s rat io L A w ill be influenced by administ rat ive st at us of local
governm ent In accordance w it h perfor mance rat io, municipalit y as t he cent er of indust ry and ser vice
t ends t o have mor e opport unit ies t o earn local government original revenue and local governm ent t ot al revenue. The rise of local governm ent r evenue t ends t o enhance t he value of
asset , cet eris paribus. Thus, it is expect ed t hat adm inist rat ive st at us of local governm ent w ill influence t he perfor mance rat io.
Based on t he above discussion, t his research proposes t he follow ing hypot heses: H4g: Asset s t urnover rat io AT w ill be influenced by administ rat ive st at us of local gover nment
H4h: Local gover nm ent original revenue t o t ot al r evenue r at io LORTOR w ill be inf luenced by administ rat ive st at us of local governm ent
H4i: Local governm ent original revenue t o operat ing expense rat io LORPREX w ill be influenced by administ rat ive st at us of local governm ent
b. Island-based locat ion of local governm ent
The st udy about economic disparit y is alw ays int erest ing. The debat e over t he causes of economic disparit y opens a chance for r esear chers t o conduct ext ensive r esear ches in a deeper
manner. This is show n by several r esearches conduct ed Hult en and Schw ab 1984 in Bhinadi 2003, Klenow and Clar e 1997 in Bhinadi 2003, and East erly and Levine 1992 in Bhinadi
2003. Hult en and Schw ab 1991 in Bhinadi 2003 st at ed t hat gr ow t h differ ence in America is mainly caused by labor grow t h dif fer ence and capit al grow t h dif fer ence. Klenow and Clar e 1997
in Bhinadi 2003 concluded t hat grow t h -level differ ences in 91 percent invest igat ed count ries ar e caused by gr ow t h diff er ence in t ot al fact or pr oduct i vit y, not caused by capit al grow t h. East erly
xlvii and Levine 2000 f ound t hat physical fact ors fail in explaining cross-count r y and cross t ime
grow t h difference. When discussing about diff erences bet w een Java and Bali versus local governm ent s locat ed
out side t hose islands, t he frequent ly discussed t opic is about disparit y, especially in economic disparit y. Bhinadi 2003 st at ed t hat t her e ar e t w o issues w hen discussing about regional
economic disparit y. The first issue r elat es t o r esour ces of regional grow t h. The second issue relat es t o t he r egional disparit y it self. Bhinadi 2003 analyzes t he r egional disparit y bet w een Java
and out side Java and finds t hat t her e is no regional grow t h disparit y bet w een t hem. On t he cont rar y, t he official release from The M inist ry of Underdeveloped Regions and The Accelerat ion
of Indonesian East Region Development in 2008 st at es t hat f rom all local governm ent s classified as underdeveloped region, 91 per cent ar e cont ribut ed by t he local governm ent out side Java-Bali,
w hereas Java and Bali only cont ribut e t he rest of t he per cent age. Edy 2009 st at ed t hat f rom 2001 unt il 2007, Java and Bali cont r ibut e sixt y percent t o nat ional gr oss dom est ic product s GDP
and all areas locat ed out side t hose islands cont ribut e t he r est i.e. fort y percent . Thus, t he influence of island-based local government on financial per for mance is expect ed t o be similar t o
t he inf luence of GRDP on financial performance. From t he discussion above, t his research proposes t he follow ing hypot hesis:
H5a: Ret urn on equit y ROE w ill be influenced by island-based locat ion of local gover nment H5b: Ret urn on asset s ROA w ill be influenced by island-based locat ion of local governm ent
H5c: Profit margin PM w ill be influenced by island-based locat ion of local governm ent H5d: Current rat io CR w ill be influenced by island-based locat ion of local governm ent
xlviii H5e: Debt t o equit y rat io D E w ill be influenced by island-based locat ion of local government
H5f: Long t er m debt t o t ot al asset s rat io L A w ill be influenced by island-based locat ion of local governm ent
H5g: Asset s t urnover rat io AT w ill be influenced by island-based locat ion of local governm ent H5h: Local gover nm ent original revenue t o t ot al r evenue r at io LORTOR w ill be inf luenced by
island-based locat ion of local governm ent H5i: Local governm ent original revenue t o operat ing expense rat io LORPREX w ill be influenced
by island-based locat ion of local governm ent
D. Theoretical Framew ork
