Efficiency is considered a strategic tool in local governments (LGs) and several studies have investigated this delicate issue. However, the previous literature has rarely examined if a relationship between efficiency and financial condition does exist. Accordingly, based on a large sample of Italian and Spanish LGs with more than 50,000 inhabitants, the authors aim to investigate the potential impact of the efficiency of LGs on their financial health. Empirical findings, which are obtained from a model based on a stochastic parametric approach to measure efficiency, suggest the existence of such impact, even if it is conditioned by the type of expenditure, the political ideology of the government, as well as by the national and macroeconomic environment.