<![CDATA[AbstractMain Purpose This study aims to analyze the influence of fiscal decentralization on the financial health of local governments by placing capital expenditure as a mediation variable. Method This study uses a quantitative approach based on secondary data from 482 Indonesian local governments during 2019–2023. The hypotheses were tested using panel regression and path analysis to examine the mediating role of capital expenditure. Main Findings The findings show that the efficiency of the transformation of funds into public investment is the main determinant of the success of fiscal decentralization. Targeted capital expenditure allocation has been proven to be able to improve regional accountability and financial reporting standards automatically. Regional financial stability is highly dependent on the ability of local governments to manage development budgets to optimize existing resources.Theory and Practical Implications Theoretically, this study strengthens the accounting literature on the important role of productive assets in maintaining the sustainability of public sector financial performance. Practically, local governments are encouraged to be more selective in spending policies so that central funds have a long-term impact on fiscal stability. Novelty The novelty of this research lies in the use of an accounting perspective that positions capital expenditure as an intermediate factor in determining sustainable regional financial performance. ]]>
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