Sticky Distress: Persistence and Sectoral Heterogeneity of Corporate Financial Distress on the Indonesia Stock Exchange 2021 – 2025

Abstract

This study examines the dynamics of corporate financial distress among 662 firms listed on the Indonesia Stock Exchange (IDX) from 2021 to 2025, using an unbalanced panel of firm-year observations and sector-adaptive Altman models the four-variable Z″ model for service and emerging-market sectors and the original five-variable Z-score for manufacturing sectors. Contrary to expectations of a post-pandemic recovery, aggregate distress remains remarkably stable, with about one-quarter of listed firms distressed each year. This aggregate stability conceals strong firm-level persistence: first-order Markov analysis and dynamic panel logit models with firm-clustered standard errors show that prior distress substantially raises the probability of current distress even after controlling for lagged fundamentals and for sector and year fixed effects, indicating genuine state dependence rather than transient shocks. Persistence is broadly uniform across sectors, whereas the incidence of distress varies widely, so that the sectoral pattern reflects differential entry into distress rather than differential escape. A genuine out-of-sample test confirms strong early-warning power. The study contributes theoretically by reframing distress as a dynamic, state-dependent condition rather than a static classification problem; methodologically by combining sector-adaptive Altman scoring with Markov transition and dynamic-panel evidence; and practically by giving creditors, auditors, and regulators a transparent basis for sector-specific early-warning systems. The findings characterize corporate financial distress in this emerging market as a largely structural, sector-dependent condition rather than a cyclical event