Too much or too little? Financial and digital literacy and IPO underpricing in Europe

Abstract

This paper examines the non-linear relation between country-level financial and digital literacy and initial public offering (IPO) underpricing in European stock markets. Using 856 IPOs from 26 countries over 2015–2024, we estimate regression models with controls for offer size, firm age, overallotment, multi-bookrunner, venture capital backing, hot-market conditions, foreign direct investment, GDP growth, GDP, the anti-self-dealing index, and regional, month-of-issuance, and industry fixed effects. We find U-shaped relationships between IPO underpricing and both financial and digital literacy. Underpricing is minimized at intermediate literacy levels, implying that countries with very low or very high literacy exhibit higher first-day returns than countries with moderate literacy. For financial literacy, the interior minimum is at a score of 52.2 (Sasabuchi joint p = 0.013). Moving from the lowest observed score (22) to this inflection point reduces predicted underpricing by 13.7 percentage points, whereas moving from the inflection point to the highest observed score (71) increases it by 5.3 percentage points. For digital literacy, the interior minimum is 63.6 (Sasabuchi joint p = 0.020). Moving from the lowest observed score (42) to this point reduces underpricing by 9.3 percentage points, while increasing digital literacy to the sample maximum (81) raises underpricing by 5.7 percentage points. These dual-literacy effects provide the first joint cross-country test of adverse-selection and rent-extraction mechanisms. The findings show that human capital, particularly financial and digital skills, shapes primary-market pricing efficiency through competing frictions, with implications for issuers, underwriters, investors, and regulators seeking to improve IPO pricing design and market functioning.