Financial Distress Trajectories: A Sequence Analysis of Non-Financial Firms Listed on Borsa Istanbul

Financial distress models often treat firm-year observations as snapshots, obscuring whether a firm’s condition is temporary, persistent, recurrent, or recently recovered. This study examines whether financial-state history adds information about next-year deterioration and recovery beyond current financial ratios. Using 2016–2024 data for 258 non-financial firms listed on Borsa Istanbul, annual Altman-based states were coded as healthy, risky, or distressed. Optimal matching with partitioning around medoids identified complete-sequence patterns, and dynamic Hamming distance was used as a robustness check. Rolling history measures were then entered into discrete-time logistic models with firm-clustered standard errors and evaluated by firm-grouped repeated cross-validation. Two stable trajectory families emerged: predominantly healthy and prolonged or recurrent distress. Among healthy firms, each additional prior state transition was associated with 63.6% higher odds of next-year deterioration. Among non-healthy firms, each additional year in the current distress spell was associated with 24.6% lower odds of recovery. The findings are consistent with history dependence in financial-state transitions and show that deterioration and recovery are associated with different historical features.