Duration dependence and sectoral heterogeneity in financial distress: Evidence from Serbian enterprises, 2013-2023

This paper addresses the limited evidence on duration dependence in corporate financial distress in emerging economies by examining sectoral heterogeneity and exit dynamics among Serbian medium and large enterprises. Using discrete-time hazard models on 609 distress episodes (2013-2023), the analysis finds that the estimated exit probability falls from 37.8% in the first year to 10.4% by year six, with strong negative duration dependence that is robust across alternative specifications. Regulated sectors exhibit a median distress duration of four years compared with two years in market-oriented sectors. Sectoral effects persist after controlling for firm characteristics and entry conditions, consistent with institutional features shaping distress persistence beyond firm-level determinants. These findings indicate that prolonged distress reduces firms' likelihood of recovery, with implications for the timing of restructuring interventions. Passive adjustment appears insufficient, and delayed action may contribute to resource misallocation, particularly in regulated sectors where institutional barriers compound firm-level constraints.