CORPORATE GOVERNANCE AND BANKRUPTCY OF TRANSMILE GROUP

BERHAD: A STUDY OF FIRM SPECIFICATION AND MACROECONOMIC IN

MALAYSIA

LIAU SHU KHIM

UNIVERSITI UTARA MALAYSIA (UUM)

ABSTRACT

Bankruptcy of the company can caused by both internal and external factors, which is

corporate governance index, Return on asset (ROA), Return on equity (ROE), Tobin’s Q, GDP

per capita (USD), unemployment rate and exchange rate. It is to identify which factors are the

most important for the company to sustain the ability to continue the business. The data used to

conduct this research are extracted from annual reports of this company from year 2005 to 2009.

This study aims to investigate the impact of bankruptcy on Transmile Group Berhad’s

consequence and reputation, coupled with its national, social and economic impact. The analysis

and findings shows that the external factor (GDP per capita) has a greater impact on the Altman

Z-score among the Transmile Group Berhad as compared to the internal factors. This study also

suggest that it is necessary for a firm is capable to concentrate on the economy of that country to

make sure they can manage the firm properly although the economy is not good on that time.

Besides, the company should manage to reduce the probability of scandal to happen in their firm.

It can achieved by make sure the independent of director and disclose the information of

company.

Keywords: GDP per capita, Altman Z-score

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1.0 INTRODUCTION
1.1 Introduction
Transmile Group Berhad, an investment holding company, provides air transportation

and related services; and deals in aircraft, aircraft parts and equipment. It also provides

express distribution and logistics management services; and aircraft leasing services. The

company was founded by Gan Boon Aun in November 1993 and was later listed on the

Bursa Malaysia Securities Berhad (Bursa Malaysia) on 27 June 1997 (Nik Rosnah Wan

Abdullah, 2012). It operates a fully integrated centre in Subang Airport in Kuala Lumpur

where Transmile is self-sufficient enough to handle its own maintenance, warehousing, cargo

handling as well as other related services. Aside from that, it additionally offer outsider

administrations that covers airplane support, warehousing and slope dealing with

administrations in their base (Fortune.my, 2014).

In line with the Malaysian Code on Corporate Governance (the “Code”) in 2000, the

Board of Directors (“the Board”) is fully committed in supporting the Code and its principles

and best practices. The Board has also set up a number of standing committees including

Audit Committee, Nomination Committee and Remuneration Committee. (TRANSMILE

GROUP BHD, 2006).

In 28 April 2004, Transmile appointed Tun Dr Ling Liong Sik as its independent and

non-executive chairman and the outgoing chairman cum executive director, Gan Boon Aun

had been re-designated as director and chief executive officer (CEO) of the company. Two

independent directors of Transmile, Shukri Sheikh Abdul Tawab and Jimmy Chin Keem

Feung were also members of the company’s audit committee, had approved the release of the

revenue figure despite knowing that the auditors had raised corporate accounting scandal

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regarding the unaudited 2006 results (Oh, 2015). In July 2007, three former top executives of

Transmile Group Bhd, Gan Boon Aun, Lo Chok Ping and Khiudin Mohd were charged with

abetting the cargo airline in making a misleading statement about reported revenue of

RM338 million. This referred to the company’s quarterly report that contained the unaudited

consolidated results for the financial year ended December 2006. Due to the lack of bill

support and failure to pass the audit, the group immediately announced a special audit for the

accounts. According to a special audit carried out by Moores Rowland Risk Management

Sdn. Bhd, Transmile made pre-tax losses of RM126 million and RM77 million for FY 2006

and FY 2005 , respectively, instead of pre-tax profits of RM207 million and RM120 million

as originally reported. This means that Transmile had overstated its revenue by RM197

million in 2005 and by RM333 million in 2006. That is a total of RM530 million

(Malaysiakini, 2007).

This accounting fraud definitely affected the company's reputation. The company’s

share price plummeted and investors from foreign countries also rushed to sell their shares.

It’s going to be difficult to regain the confidence of investors. The company violated the

business ethics of corporate governance principles. They deliberately deceived public and

innocent investors; and writing the original loss as profit, which itself has moral errors.

Imprisonment and fines are inevitable if the company intentionally commits a crime and

violates previously enacted laws. Through the principle of accountability, the individuals

who make the accounting fraud should be accountable for the decisions they make and the

actions they take. According to the meaning of transparency, the company is required to

publish all the information without any hidden information to the public investors. Obviously,

the Transmile Group Berhad did not reveal the actual accounting situation.

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1.2 Research Objectives
This study aims to investigate the impact of bankruptcy on a company’s

consequence and reputation, coupled with its national, social and economic impact. The

objectives of this study are:

1. To investigate the internal factors towards bankruptcy in selected companies.

2. To investigate the external factors towards bankruptcy in selected companies.

3. To investigate the internal and external factors towards bankruptcy in selected companies.

1.3 Research Questions

1. Is there any relationship between internal factors towards bankruptcy?

2. Is there any relationship between external factors towards bankruptcy?

3. Is there any relationship between internal and external factors towards bankruptcy?

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2.0 LITERATURE REVIEW
In this literature review, the objectives from these studies are observe from article.

In this research it will be talk about five articles that relate to the scandals, bankruptcy or

Altman Z, performance, Tobin Q and macroeconomic. According to Anup Agrawal and

Sahiba Chadha (2005), this article empirically examines whether certain corporate

governance mechanisms are related to the probability of a company restating its earnings.

The widespread failure in financial reporting has largely been blamed on weak internal

controls. Stresses over accounting problems are generally referred to as an explanation

behind for the stock market slump that followed these scandals. From this article, we

know that the specific corporate governance issues are boards and audit committee

independence, the use of independent directors with financial expertise on the board or

audit committee, conflicts of interest faced by outside auditors providing consulting

services to the company, membership of independent directors with large stake on the

board or audit committee, and the influence of the chief executive officer (CEO) on the

board. In some case, audit committees of corporate boards are typically not very active.

They usually meet just a few (two or three) times a year. Therefore, even if the committee

is comprised of independent directors, it may be hard for a small group of outsiders to

detect fraud or accounting irregularities in a large, complex corporation in such a short

time. On the other hand, if the member with expertise is not effective in monitoring

(perhaps because not enough time is spent monitoring), the board or audit committee may

actually be less effective. This would be the relation between the financial expertise of

boards and audit committees and the likelihood of earnings restatement by a firm

(Chadha, 2005).

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 According to Will Kenton (2019), the Altman Z-score can be defined as the

output of a credit-strength test that gauges a publicly traded manufacturing company's

likelihood of bankruptcy. The Altman Z-score is based on five financial ratios that can

calculate from data found on a company's annual 10-K report. It uses profitability,

leverage, liquidity, solvency and activity to predict whether a company has high

probability of being insolvent. In spite of the vast research on failure prediction, the

original Z-Score Model introduced by Altman (1968) has been the dominant model

connected everywhere throughout the world. Thus, although the Z-Score Model has been

in existence for more than 45 years, it is still used as a main or supporting tool for

bankruptcy or financial distress prediction or analysis, both in research and practice

(Edward I. Altman, 2014). In the decade of the 1980s, the bankruptcy reorganization of

companies worth hundreds of millions or even billions of dollars wound up ordinary. The

companies that sought the protection of the bankruptcy courts were generally in gigantic

change. Under bankruptcy law, it fell to the incumbent managers to decide how to react

to these problems. Their decisions were often between courses of action that would serve

either the interests of their shareholders or the interests of their creditors, one at the

expense of the other (WHITFOR, 1993).

As indicated by Sanjai Bhagat and Brian Bolton (2007), none of the governance

measures are correlated with future stock market performance. In several instances

inferences regarding the (stock market) performance and governance relationship do

depend on whether or not one takes into account the endogenous nature of the

relationship between governance and (stock market) performance. Given poor firm

performance, the probability of disciplinary management turnover is positively correlated

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with stock ownership of board members, and with board independence. However, given

poor firm performance, the probability of disciplinary management turnover is negatively

correlated with better governance measures (Bolton, 2008).

Meanwhile according to Adam Hayes (2019), the Tobin's Q ratio equals the

market value of a company divided by its assets' replacement cost. Thus, equilibrium is

when market value equals replacement cost. The Tobin's Q ratio is a ratio popularized by

James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the

combined market value of all the companies on the stock market should be about equal to

their replacement costs. Better corporate governance is associated with higher operating

performance and higher Tobin's-Q. Not surprisingly, the country-average governance

index is higher in countries with good overall legal systems. The auditors use Tobin's-Q

to measure the market valuation of assets and return on assets (ROA) as a measure of

operating performance. A growing firm with large needs for outside financing has more

incentive to adopt better governance practices in order to lower its cost of capital. This

proposition was testing by using the growth rate of sales as one of the determinants of

governance and find significantly positive correlation. These growth opportunities should

also be reflected in the market valuation of the firm, thus creating a positive correlation

between governance and Tobin's-Q (Klapper, 2002).

While globalization has wide cultural and political resonances in the general

literature, its effects on corporate governance outcomes is primarily because of the

integration of financial markets and the lowering of trade barriers. Both of these elements

are part of the macro economy. The article was explored the effect of the liberalization of

trade and finance on corporate governance systems by taking, as a starting point, a

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macroeconomic perspective. Macroeconomists are interested in areas of the economy,

such as employment, trade, capital controls, growth and price stability, that do not appear

on the radar if one focuses on the micro level where the analysis is on individual markets

and firms (Galanis, 2008).

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3.0 METHODOLOGY
3.1 Introduction
Data collection methods are a vital part of research design. It is a systematic

investigation into and study of materials and sources in order to establish facts and reach

new conclusions. The purpose of this research is to identify the Altman Z or bankruptcy

of a company that selected by researcher by using IBM Statistical Package for the Social

Sciences (SPSS) Statistics version 25 to collect and analyze data.

3.2 Sampling Technique

The population of this research is all the companies that there have been scandals

happen before. From these companies, only one company is selected that is Transmile

Group Berhad. This company is selected because this scandal not only cast a shadow

over the Malaysian stock market, which recently emerged from the 1997 Asian financial

crisis, but also caused a certain degree of blow to investor confidence. The Annual Report

of this company from year 2005 until 2009 is used to determine the relationship between

dependent variables (Altman Z) and independent variables (Tobin Q, performance and

macroeconomic factors).

3.3 Statistical Technique

This study is focus on the companies that occurred scandal that was violating the

role of corporate governance. The samples for this research are chosen from well-known

Malaysian companies that have been caught in a false accounting scandal. The data used

to conduct this research are extracted from annual reports of this company from year

2005 to 2009. There are 10 elements that used to identify the corporate governance index

for the company that is board structure index , committee elements, general procedure

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 elements, audit committee procedure elements, financial disclosure elements, non-

financial disclosure elements, disclosure reliability elements, ownership structure index,

shareholder rights index, and related party volume elements. Income statement and

balance sheet in the annual report which contain the financial information is used to

evaluate the financial performance of company by computing financial ratios such as

return on assets and return on equity, Tobin's Q, and Altman Z. For the macroeconomics

factors, historical data of GDP per capital (USD), unemployment rate, and exchange rate

from year 2005 to 2009 are taken from Focus Economics to analyze the economic

condition.

3.4 Data Analysis

In this research, one dependent variable (Altman Z) and two categories of

independent variables (internal and external factors) are used. The research framework is

shown as below:

Internal factors

Altman Z-Score

External factors

Independent Variables (IV) Dependent Variables (DV)

. Figure 3.1 Research Framework

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Table 3.1 Measurement of Variables

No. Variables Measurement

T1 = (Current Assets − Current Liabilities) /
1 Altman Z Total Assets

T2 = Retained Earnings / Total Assets

T3 = Earnings Before Interest and Taxes / Total

Assets

T4 = Book Value of Equity / Total Liabilities

Z-Score bankruptcy model:

2 Corporate Governance Index
3 Return on Assets (ROA)
4 Return on Equity (ROE)
5 Tobin's Q
Gross Domestic Products
6 (GDP)
7 Unemployment rate
8 Exchange rate
Z = 6.56T1 + 3.26T2 + 6.72T3 + 1.05T4
(∑Total/Number of Item)/10
Net income / Total assets
Net income/ Shareholder’s equity
Total Market Value of Firm / Total Asset Value
of Firm
5-years gross domestic products
5-years unemployment rate
5-years exchange rate

3.5 IBM Statistical Package for Social Sciences (SPSS Statistics)

In order to complete this research, IBM SPSS Statistics version 25 was used to
compute data from the annual reports to acquire the result. Statistical Package for the
Social Sciences or SPSS were developed by Norman H. Nie, C. Hadlai (Tex) Hull and
Dale H. Bent at University of Standford. SPSS Statistics is a software package used for
interactive or batched, statistical analysis. Long produced by SPSS Inc., it was acquired
by IBM in 2009. The current versions (2015) are named IBM SPSS Statistics. For this
research, IBM SPSS Statistics were used to compute descriptive statistics, linear
regression, correlation and coefficient between independent variables and dependent
variable based on quantitative data extracted from annual reports.

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4.0 ANALYSIS AND FINDING
4.1 Introduction
This study is investigating about the internal factors, external factors, internal and

external factors that contributing to bankruptcy. The internal factors included corporate

governance index, ROA and ROE, while external factors included Tobin’s Q, Altman Z,

GDP per capital (USD), unemployment rate and exchange rate (MYR to USD). For this

analysis, Altman Z is used as dependent variable to determine the relationship between

each factor and bankruptcy.

4.2 Descriptive Statistics

Table 1: Descriptive Statistics for internal and external model

According to Altman Edward, score below 1.1 means it's likely the company is

headed for bankruptcy (“Distress” Zone), while companies with scores above 2.6 are not

likely to go bankrupt (“Safe” Zone). Investors can use Altman Z-scores to determine

whether they should buy or sell a stock if they're concerned about the company's

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underlying financial strength. Investors may consider purchasing a stock if its Altman Z-

Score value is closer to 2.6 and selling or shorting a stock if the value is closer to 1.1.

According to Table 1 from the SPSS results, it can defined that the company is in the

zone of ignorance or grey area when the mean of Altman Z-score for the 5 years is 1.65.

The standard deviation of Transmile is 2.67 show that the company have the score

fluctuating throughout the years.

According to the Table 1, the corporate governance index of Transmile Group

Bhd is 83% which is consider good corporate governance. Besides that, the company lack

of most of the elements that fall under the Shareholder Rights Index. On the other hand, it

fulfilled most of the elements in Committee Elements, Audit Committee Procedure

Elements and Financial Disclosure Elements. The corporate governance index value

doesn’t fluctuate much throughout the 5 years due to the nearly 0 of standard deviation.

Furthermore, the Return on Assets (ROA) that indicate how profitable a company

is relative to its total assets where the Return on Equity (ROE) is measures a corporation's

profitability by revealing how much profit a company generates with the money

shareholders have invested. The average ROA of the company is relatively low compared

to ROE which is 18.96% and 27.24% respectively. The 27.24% of ROE tells us that the

company generated a 27.24% profit on every dollar invested by shareholders which is

considered high profit and it also is taking higher risks. The standard deviation of ROA

and ROE is 0.14 and 5.33.

According to the result, the Tobin's Q ratio of the company is 2.6 which is more

than 1. The Tobin's Q is above 1 means that the firm is worth more than the cost of its

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assets. Because Tobin's premise is that firms should be worth what their assets are worth,

anything above 1.0 theoretically indicates that a company is overvalued. The average

GDP per capital of Malaysia from year 2003 until year 2007 is 6985.67 USD with

standard deviation of 1123.64 which is highly volatile. Besides that, the mean of

unemployment rate of Malaysia is 3.42 and have some small changes on the value due to

standard deviation of 0.18. Last but not least, the exchange rates (MYR to USD) for the 5

years have the mean of 0.28 with a low standard deviation of 0.02.

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4.2 Correlation
Table 2: Correlations for internal and external model

Pearson correlation is used to determine the relationship between dependent

variable (Altman Z) and independent variables (internal and external factor variables).

From the result, the Altman Z is positively correlated to corporate governance index with

p value larger than 0.1 where the corporate governance index increase, Altman Z also

increase at the same time but insignificantly. According to (Dharmastuti, 2015 ), poor

corporate governance practice and the failure of corporate governance mechanisms is a

significant contributing factor on a number of firm bankruptcies. That means when

there is good corporate governance in that company, the Altman Z is high or in the safe

zone. Besides that, Altman Z has negatively correlated with Return on Assets (ROA) and

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Return on Equity (ROE) with p value larger than 0.1 which indicates the lower

profitability as the Altman Z is distress at the same time but insignificantly. High Z

scores indicate strong financial health while low scores indicate financial distress

(Suzanne K. Hayes, 2010).

Furthermore, Altman Z shows negative but insignificant correlated with Tobin’s

Q with p value larger than 0.1 which indicates when the Tobin’s Q decrease, Altman Z

increase. According to (Soheil Kazemian, 2017), a lower company performance indicates

a lower financial health of the company. In other words, there is a high possibility of

financial distress if there is poor performance in the company. Besides that, Altman Z

also has negatively significant correlated with GDP per capita with p value lesser than

0.05. It indicates that the Altman Z is increasing as the GDP per capita is decreasing. In

addition, Altman Z has positive but insignificant correlated with unemployment rate. It

means that Altman Z will increase as the unemployment rate also increase at the same

time. According to (Marcela Basovn í kov á , 2018) state that the main reason of

bankruptcy of these companies was not the economic crisis but mainly poor financial

management. Last but not least, the Altman Z is negatively significant correlated to

exchange rate with p value less than 0.05 which means that Altman Z will increases as

the exchange rate also increase.

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4.3 Coefficient
Table 3: Coefficients for internal and external model

The analysis on coefficients shows how the independent variables that has

influence on the Altman Z can be determined through the identification of significant

level of 5 % with p-value. P-value = 0.000 implies that the independent variables has

most significant influence on dependent variable, P-value < 0.001 indicates that the

independent variable has strong influence on the dependent variable. P-value < 0.05

indicates a moderate influence of independent variable on the dependent variable while

variable that has P-value < 0.10 has the least significant influence.

Based on table 3, GDP per capital is negatively significant influence to Altman Z

with P-value < 0.05 (0.03) and t=-3.907. It implies that any changes in the GDP per

capital will influence the level of Altman Z. On the other hand, the result has shown that

other independent variables do not have influenced on the dependent variable (Alman Z).

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4.4 Model Summary
Table 4: Model Summary for internal and external model

Table 5: Anova result for internal and external model

According to the result in Table 4, the adjusted R-Squared is equal to 78.1%. This

implies that by using all the internal variables (Corporate Governance Index, ROA, ROE)

and macro-economic variables (Tobin’s Q, GDP per capital, Unemployment Rate and

Exchange Rate) in Model 3, it is shown that the variables used in the model are able to

explain 78.1% of the variance in contributing to bankruptcy of a company. While the

remaining of 21.9% of the adjusted R-Squared remain unknown and this implies that the

variance in the factors that leading to bankruptcy of a company are unable to be

explained by the both the internal and external factors for Model 3. Besides that, the

ANOVA table above shows a significant value of 0.03 which is below the value (p <

0.05). It indicates that there is a statistically significant difference between conditions

means. The differences between condition Means are not likely due to change and are

probably due to the IV manipulation.

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5.0 DISCUSSION AND CONCLUSION
5.1 Introduction
This study aims to investigate the impact of bankruptcy on a company’s consequence

and reputation, coupled with its national, social and economic impact. To achieve this

objective, three internal factors (corporate governance index, ROA and ROE) and four

external factors (Tobin’s Q, GDP per capital (USD), unemployment rate and exchange

rate) were investigated in this study. This chapter will discuss about the findings in

previous chapter and conclusion.

5.2 Discussion of Result

This study aims to investigate the impact of bankruptcy on a company’s consequence and

reputation, coupled with its national, social and economic impact. The objectives of this

study are:

1. To investigate the internal factors towards bankruptcy in selected companies.

2. To investigate the external factors towards bankruptcy in selected companies.

3. To investigate the internal and external factors towards bankruptcy in selected

companies.

Based on the table of both correlation (Table 2) and coefficient (Table 3), there

are evidence showing that Altman Z has been influenced and affected by external factors

only in terms of GDP per capita (USD). It is shown that GDP per capita (USD) is

strongly negative and significantly correlated to Altman Z with p-value < 0.05 (0.03). It

indicates that when the GDP per capita (USD) increases, the Altman Z will decrease.

Based on coefficient table, GDP per capital is negatively significant influence to Altman

Z with P-value < 0.05 (0.03) and t=-3.907. Corporate governance index, ROA, ROE,

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 Tobin’s Q and unemployment rate was found to play little or nearly insignificant role on

influencing the Altman Z to the bankruptcy of company.

Overall, it can be concluded that both internal factors and external factors tend to

influence the bankruptcy of company together. The model summary (Table 4) shows that

78.1% of model 3 is explained by the variables from internal factors and external factors.

The ANOVA table shows a significant value of 0.03 indicates that there is a statistically

significant difference between conditions means. In conclusion, based on the values of

adjusted R-squared obtained by model 1 and model 2, it can be concluded that the

external factors has a greater impact on the Altman Z-score among the Transmile Group

Berhad as compared to the internal factors.

5.3 Limitations
This study is limited to only bankruptcy Transmie Group Berhad that because of

scandal. This study covers only five years financial statements from year 2005 until 2009

for that selected company. Thus, only limited amount of information can be collected and

analyzed due to the time constraint.

5.3 Recommendations
Based on the study, GDP per capita (USD) show a significant relationship with

Altman Z. GDP refers to the total value of final goods and services produced within a

country’s borders during a specific calendar period such as quarterly or annually. There’s

a slight correlation between bankruptcy and income. Income rises as time passes, but

bankruptcy bounces. When the economy of a country is good, the chance of bankruptcy

will decrease.

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 References
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Available:http://www.stern.nyu.edu/fin/workpapers/papers2002/pdf/wp a02041.pdf

Bolton, S. B. (2008). Corporate Governance And Firm Performance. Journal of corporate finance.

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Dharmastuti, R. T. ( 2015 ). HOW DO CORPORATE GOVERNANCE MECHANISMS AFFECT A FIRM’S

POTENTIAL FOR BANKRUPTCY? Risk governance & control: financial markets & institutions ,
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Edward I. Altman, M. I.-D. (2014, July 9). Distressed Firm and Bankruptcy Prediction in an International Context:
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an International Context: A review and empirical analysis of Altman’s Z-score model.

Fortune.my. (2014, December 31). Transmile Group Berhad (Main Market). Retrieved from Transmile Group
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Malaysiakini. (2007, June 2). Liong Sik must explain Transmile fraud. Retrieved from Malaysiakini:
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Marcela Basovníková, M. K. (2018). The use of the Altman model in evaluation of economic performance of a
corporation in the crisis periop in the building sector in the Czech Republic. Acta Universitatis
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Nik Rosnah Wan Abdullah, M. Z. (2012, June). Case Study: Transmile Group Berhad. NIDA Case Research
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 APPENDICES

A. SPSS Output for Model 1 (Internal Independent Variables)

Table A.1 Descriptive Statistics

Table A.2 Correlation

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Table A.3 Multiple Regression Coefficient

Table A.4 Model Summary

Table A.5 ANOVA

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B. SPSS Output for Model 2 (External Independent Variables)

Table B.1 Descriptive Statistics

Table B.2 Correlation

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Table B.3 Multiple Regression Coefficient

Table B.4 Model Summary

Table B.5 ANOVA

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C. SPSS output for Model 3 (Pooled Model)

Table C.1 Descriptive Statistics

Table C.2 Correlations

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Table C.3 Coefficients

Table C.4 Model Summary

Table C.5 ANOVA

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D. Charts for Model 3

Chart D.1 Histogram

Chart D.2 Normal P-P Plot of Regression Standardized Residual

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Chart D.3 Scatterplot

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