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, nonfinancial 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.
1
Variables
Altman Z
Measurement
T1 = (Current Assets − Current Liabilities) /
Total Assets
T2 = Retained Earnings / Total Assets
T3 = Earnings Before Interest and Taxes / Total
Assets
T4 = Book Value of Equity / Total Liabilities
3.5
2
3
4
Corporate Governance Index
Return on Assets (ROA)
Return on Equity (ROE)
5
6
7
Tobin's Q
Gross Domestic Products
(GDP)
Unemployment rate
8
Exchange rate
Z-Score bankruptcy model:
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
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 ZScore 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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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
Table B.2
Descriptive Statistics
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
Page 29 of 30
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Chart D.3
Scatterplot
Page 30 of 30
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