Volume 7 Issue 1

This research examines regional government performance in Indonesia's provinces after the implementation of fiscal decentralization in 2001 using a two-stage approach. First, extensive input and output data are utilized to measure government productivity and efficiency indices using a Malmquist productivity index (MPI) for four significant expenditures for the 2004-2015 period: infrastructure, education, health and social protection. Second, the relationship between the degree of fiscal decentralization and the first-stage productivity scores is analyzed using a Tobit model. This study provides extensive and internationally comparable data that distinguish it from existing studies in Indonesia because appropriate input and output data are the significant elements in measuring government expenditure efficiency. From the estimation results, the degree of fiscal decentralization is found to promote government expenditure efficiency. Tax revenue collected by regional governments will support government expenditure efficiency in the infrastructure, education and health sectors; however, the degree of fiscal decentralization seems to negatively affect the government expenditure efficiency in the social protection sector. Therefore, the methodology constructed in this research can be a prominent instrument for the government to upgrade regional government performance in Indonesia.

The study proposes and tests a risk-free rate model that simultaneously lets the risk-free rate migrate between rating categories as risk-free rate ranges, and follow a random walk within rating categories as risk-free rate ranges. Although the study arbitrarily assigned rating categories, and risk-free rate ranges to the rating categories, empirical research can clarify this, by examining the relationship between the risk-free rate and risk-free rate volatility, and by examining the relationship between sovereign credit ratings and risk-free rate ranges as well as risk-free rate volatility. Firstly, comparable risk-free rates should illustrate comparable risk-free rate volatility, and risk-free rates should cluster in terms of their risk-free rate volatility characteristics. Secondly, sovereign credit ratings should demonstrate risk-free rate ranges and risk-free rate volatility characteristics. To test the model, a risk-free bond portfolio, together with a risk-free rate rating migration matrix were simulated. The rating migration matrix governs the migration between risk-free rate rating categories. It is shown that the original migration matrix can again be decomposed with adequate accuracy, given that the appropriate constraints are used. It indicates that the model can be applied to empirical markets. Possible refinements to the model are noted.

The study reviews equity valuation, and proposes an alternative equity valuation model based on a random process modelling of earnings and equity growth. A Markov process is used to model earnings, standardized as earnings to book value, and book value based on rating category. This assumes a distinct relationship between rating category, and standardized earnings as well as book value: that both standardized earnings as well as book value are comparable per rating category, but distinct across rating categories. It is also assumed that a company inherits the earnings and book value distribution of its current rating. To test the premises of the equity valuation model, the study examines the standardized earnings and book value distributions of rating categories. The research population comprised all publicly-traded, rated equity of the JSE and NYSE stock markets. Sample data was limited to all equity of the major rating categories (AAA, AA, A, BBB, BB, B) for the 8 year window period 2009 to 2017. It is shown that earnings to book value are comparable per rating category, and distinct across rating categories. Analysis of book value growth revealed unexpected and surprising results, with no truly consistent pattern across rating categories, but rather individual relationships per rating category. The results raise questions regarding rating accuracy and rating theory. The implications of the results for equity valuation are discussed.