Listed small and medium-sized companies (SMEs), when applying the standards (Standards) for internal accounting control system (IACS), can apply a relaxed Standards unlike large listed companies. This study analyzes the effect of SMEs’ applying the Standards applied to large companies (applying of reinforced Standards) on the cost of equity capital (COE). In addition, this study examines whether the differential role of external corporate governance appears in the relationship between the two.
Empirical results show a negative relationship between the applying of reinforced Standards of SMEs and the COE. This suggests that reinforced application of SMEs’ increases the reliability of the accounting information process and ultimately is related to the reduction of information risk. Specifically, the result is found firms without industry specialized auditors, firms without institutional shareholders and firms with low foreign investor equity, suggesting the application of reinforced Standards is more effectively related to information risk reduction when external corporate governance is weak.
This study has a differentiated contribution by presenting empirical results that SME’s selection of the Standards affects the COE. In particular, the results of this study that proactive design and operation of IACS are related to the reduction of cost of capital.