Digital finance and IPO underpricing: Evidence from China

The development of digital finance enhances the operational efficiency and risk management capabilities of financial institutions, thereby optimizing financial resource allocation. This study investigates the impact of digital finance on initial public offering (IPO) underpricing via a sample of Chinese A-share IPOs issued between 2011 and 2022. Our empirical analysis reveals that firms located in regions with advanced digital finance development exhibit significantly less IPO share underpricing. This negative effect is strengthened in diversified firms and firms with a high level of digital transmission. The transmission mechanism shows that digital finance systems mitigate financial constraints, reduce agency costs, and alleviate information asymmetry problems. Therefore, IPO firms do not necessarily discount their shares to compensate investors for information and agency costs. Furthermore, we find that digital finance benefits the post-IPO operational performance of firms. This research extends the existing literature by identifying a novel linkage between digital finance development and IPO pricing mechanisms.