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Bankruptcy And The Altman Models. Case Of Albania

Author

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  • Numani Eni

    (Faculty of Economy, University of Tirana, Faculty of Economy, University of Tirana)

Abstract

This paper examines the univariate models for predicting bankruptcy and the multivariate models of the best known researcher in this field, the Altman models, models that use the multivariate discriminant analysis. This paper is mainly focused on the application of two of the Altman models (the revised model of 1983 and the revised model of 1993) to firms that operate in Albania, to see how its models can predict the future of Albanian firms. To assess the accuracy and the possibility of applying these models in the case of Albania, the study includes 80 firms (large firms) that operate in the service sector. To classify bankrupt and non-bankrupt firms, this study is based on the Albanian legislation on bankruptcy (Law no. 8901), according to which bankruptcy proceedings may be opened in case of a state of insolvency, when the firm is overburdened with debts or when the earnings after tax of the firm is negative for a period of 3 years. According to the Albanian legislation on bankruptcy, 24 (from 80) firms involved in the study result legally bankrupt. The first revised model (The 1983 model) of Altman predicts accurately these firms by 75%. Regarding the non-bankrupt firms (according to Albanian legislation on bankruptcy) inaccuracy in the forecast is even higher than in the case of bankrupt firms. From 56 non-bankrupt firms involved in the study, 23 are classified as insolvent company under the first revised model of Altman, while these firms are not bankrupt. In case of application of the second revised model of Altman (The 1993 model) the results are consistent with the results of the first model in terms of bankrupt firms. Meanwhile, what is striking is the significant reduction in the percentage of Type II error (from 41% to 23%).

Suggested Citation

  • Numani Eni, 2015. "Bankruptcy And The Altman Models. Case Of Albania," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(1), pages 839-845, July.
    • Handle: RePEc:ora:journl:v:1:y:2015:i:1:p:839-845
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    File URL: http://anale.steconomiceuoradea.ro/volume/2015/n1/096.pdf
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    References listed on IDEAS

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    1. Charles L. Merwin, 1942. "Financing Small Corporations in Five Manufacturing Industries, 1926–36," NBER Books, National Bureau of Economic Research, Inc, number merw42-1.
    2. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    3. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    4. Altman, Edward I., 1984. "The success of business failure prediction models : An international survey," Journal of Banking & Finance, Elsevier, vol. 8(2), pages 171-198, June.
    5. Beaver, Wh, 1966. "Financial Ratios As Predictors Of Failure," Journal of Accounting Research, Wiley Blackwell, vol. 4, pages 71-111.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Altman model; bankrupt firms; non-bankrupt firms; type I error; type II error; Albanian legislation;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law

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