Goldilocks literacy and IPO underpricing in Europe

This paper examines the non-linear relation between country-level financial and digital literacy of initial public offering (IPOs) underpricing in European stock markets. Analyzing 874 European IPOs from 2015-2024, using quadratic regression models with controls for offer size, firm age, overallotment provisions, foreign direct investment, month-of-issuance, and industry fixed effects, we identify a U-shaped pattern between IPOs underpricing and financial and digital literacy scores. Our results indicate that IPO underpricing is minimized at intermediate levels of financial literacy, therefore highlighting that countries with high and low financial literacy scores exhibit first-day returns that are higher than those observed for those with moderate financial literacy levels. For digital literacy (DL), we document a similar yet asymmetric U-shaped pattern peaking at a score of 65.1, within a range of 0-100. Moving from very low digital literacy (DL = 10) to this Goldilocks point reduces underpricing by 30 percentage points (pp). In contrast, increasing DL beyond this point, up to a score of 90, raises underpricing by only 7 pp.  The non-linear dual-literacy effects documented here extend prior linear models and highlight that human capital—specifically financial and digital skills—influences primary market pricing efficiency, with implications for issuers, underwriters, investors, and regulators seeking to optimize pricing design and market functioning. Overall, this study makes meaningful contributions to literature by extending behavioral IPO theory to incorporate (i) dual literacy and (ii) nonlinear effects that are absent from prior linear models.