The 2016 WEI International Academic Conference Proceedings Rome, Italy The West East Institute 195 FINANCIAL PERFORMANCE AND MANAGEMENT DIFFERENCES: A COMPREHENSIVE STUDY ON CAUSES OF FINANCIAL DISTRESS FOR ALBANIAN BUSINESSES Zhaklina Dhamo University of Tirana, Economic Faculty Tirana, Albania Vasilika Kume University of Tirana, Economic Faculty Tirana, Albania Abstract This paper studies the financial and management quality reasons of financial distress for the companies operating in Albania. The research follows the analysis of Dhamo and Kume (2015, 2016) regarding the quantitative and qualitative approach used for performance differentiation among companies who are facing financial distress, and those who are not facing financial distress. We use the methodology employed by Altman (2000) in assessing the probability of bankruptcy of privately owned enterprises, through the Z’ and Z”. We observe the financial performance differences of companies, which are classified as “bankrupt” versus companies that are classified as “non-bankrupt”. We compare, through a survey, the differences in management of “bankrupt” versus “non- bankrupt” companies, as per model classification. Moreover, we analyze the probability of default trends of the energy, construction, telecommunication, transportation, fast-moving consumer goods and retail sector in Albania through the period 2011-2014. The data used are the financial statements and surveys of companies, who are ranked the biggest in terms of yearly turnover, as per the Albanian Tax Authority classification. We shrink the list, by including in the study only the companies that have accepted to respond to the survey so far, by resulting in a total of 60 companies. Introduction This research follows the investigation of reasons for financial distress of businesses operating in Albania, initiated in the previous works of Dhamo and Kume (2015, 2016). One of the main objectives of the study is identifying causes of potential default. The seminal work of Altman (1968) on predicting failure through multi discriminant analysis of financial ratios, which is then followed by other studies of Altman et al. (1977, 2000, 2005, 2013, 2014), shows that business failure is affected by liquidity of firms’ assets, cumulative profitability over time, asset productivity, sales generating ability of assets, and financial leverage. The Z models proposed by Altman, which include the original Z model, Z’ model, Z” model, and emerging market model, show two types of errors. Type I error occurs when the model considers failed companies as non-failed, while Type II error occurs when the model considers non-failed companies as failed. There have been evidenced many pros and cons in the literature regarding Altman’s predictive approach for business failure. Hayes (2010) confirms that Z” model has a 94% predictive power in the retail sector of the US. Altman et al. (2014) evidenced that Z” model may perform well in different countries. The author shows that Z” models work well for Italian manufacturers, if used with caution (Altman et al, 2014). Muminovic (2013) suggests that local market model should perform better than Altman Z models in the local context. As many of the previously mentioned studies show, the predictive power of the financial ratios does not explain much of the reasoning of companies’ financial distress. Gaskill et al. (1993) evidences that retail businesses poor managerial functions, ineffective advertising/ promotional strategy, failure to generate long term business plan and personnel plan, are all factors that may cause business failure. Ropega (2011) show that the combination of both financial and organizational analysis, may help businesses track the proper actions to avoid failure. Ahmad and Seet