This study uses the agency theory framework to explore the factors affecting capital expenditures by local governments in Indonesia. Through a quantitative approach, the research examines 540 data entries from Indonesian local government financial statements for the year 2019. To test the research hypotheses, multiple regression analysis is employed, followed by an endogeneity test using Two-Stage Least Squares (2SLS) regression in SAS Studio to ensure accurate results. The study analyzes three main independent variables—Regional Original Revenue (PAD), General Allocation Fund (DAU), and Special Allocation Fund (DAK)—to understand their impact on Capital Expenditure, which serves as the dependent variable in this analysis. In this context, PAD is treated as an endogenous variable, as other internal factors within local governments may influence its fluctuations. To manage this, Gross Regional Domestic Income (GDP) and Total Population (JP) are applied as instrumental variables to correct for endogeneity, improving the robustness of the findings. The analysis reveals that both PAD and DAU have a positive impact on capital expenditure, suggesting that higher PAD and DAU levels correspond with increased capital spending. This indicates that financial independence (via PAD) and fiscal support from the central government (via DAU) enhance the ability of local governments to allocate resources effectively toward capital projects, aligning with agency theory by highlighting the central government’s role in enabling local governments to meet development goals.