Business diversification and debt default risk of real estate enterprises

This paper investigates the impact of business diversification on the debt risks of real estate enterprises. Based on the listed Chinese real estate enterprise data from 2010 to 2023, this paper employs a Double Machine Learning (DML) model to examine the heterogeneous effects of different business diversification strategies on corporate debt risk, as well as the potential channels associated with diversification strategies. The empirical results show that: (i) Compared with single-business enterprises, real estate enterprises that adopt a diversification strategy are consistently associated with lower debt risk. (ii) The structural effect indicates that related diversification strategies are positively associated with debt default risk by alleviating financing constraints; conversely, unrelated diversification strategies are negatively associated with debt default risk by worsening the enterprise’s capital allocation structure. (iii) Heterogeneity analysis reveals that managerial power has a dual effect; state-owned enterprises primarily benefit from the mitigating effect of related diversification, whereas private enterprises are more vulnerable to the impact of unrelated diversification. Furthermore, real estate enterprises significantly expand their unrelated diversification activities during the credit easing period, thereby accumulating potential debt risks in the process. The results indicate a conditional correlation between unrelated diversification expansion and resource misallocation risks, highlighting potential operational risks embedded in such an association. Overall, this study provides micro-level evidence for regulators to implement differentiated risk management for real estate enterprises.