Measuring Financial Management Climate from Government Audit Text: A Lexicon-Based Institutional Index and its Application to Fiscal Transfer Effectiveness in Philippine Local Governments

Institutional-conditionality arguments in fiscal federalism hold that the developmental returns to intergovernmental transfers depend on the recipient organization's administrative environment, yet testing such claims has been constrained by the absence of a financial-management measure resolved at the local-government-year level. This study's primary contribution is methodological: we construct a continuous Financial Management Climate (FMC) index for 1,114 Philippine cities and municipalities from the textual content of Commission on Audit Annual Audit Report Executive Summaries, using lexicon-based sentiment analysis with a domain-specific severity dictionary. The index is validated against distributional, temporal-stability, and discriminant-validity criteria, exhibiting near-normal distribution, substantial within-unit variation suitable for fixed-effects identification (57.7% of total variance), and empirical distinctness from broader governance and fiscal measures. As a demonstration application, we deploy the index in an unbalanced panel of 8,227 local-government-year observations (fiscal years 2014–2024, excluding 2018), estimating the transfer–efficiency relationship and its conditioning by FMC through a graduated hierarchy of pooled, random-effects, and two-way fixed-effects specifications with cluster-robust standard errors, across contemporaneous, lagged, and per-capita transfer formulations. The application yields three substantive results: transfers relate negatively to within-unit economic efficiency; FMC carries a modest positive direct association but does not robustly moderate transfer effectiveness once unit and year heterogeneity are absorbed; and a broader public-administration-quality measure is the most stable within-unit predictor. The findings position audit-derived text as a tractable institutional-measurement instrument for governance analytics and indicate that resource expansion in the post-Mandanas setting is conditional on general institutional capacity.