Using the data of A-share listed companies in Shanghai and Shenzhen stock markets from 2011 to 2020, this study employs the entropy weight method to construct the digital economy index. Based on this, it empirically examines the impact and underlying mechanisms of digital economy development on corporate financial risks. The findings are as follows. (1) The digital economy has a significant inhibitory effect on corporate financial risks, and absorptive capacity partially mediates this effect. (2) Digital economy development has different effects on corporate financial risks depending on the stage of the company’s lifecycle. For growing and mature companies, digital economy development significantly inhibits financial risks and absorptive capacity acts as a mediator. For companies in the decline phase, digital economy development has no significant impact on reducing financial risks, and absorptive capacity does not act as a mediator. (3) The effectiveness of the digital economy needs to be supported by fundamental conditions within the company. When a company’s digital transformation is well-established, the role of the digital economy in curbing financial risks becomes more apparent. Overall, the development of the digital economy benefits companies by enhancing absorptive capacity and reducing financial risks. The study reveals the causes of financial risks and the various roles and mechanisms of the digital economy in reducing such risks. It provides reliable empirical evidence and policy implications for alleviating corporate financial risks and has significant practical implications.