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Greenshoe

A greenshoe, also known as an overallotment option, is a provision in an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of the shares at the offering price. This mechanism helps stabilize the stock price after the IPO by providing underwriters the flexibility to cover excess demand or reduce volatility if the stock price falls below the offering price. The greenshoe option is a standard feature in most IPOs and is named after the Green Shoe Company, which first used it.

Example

During an IPO, the underwriters exercise the greenshoe option to purchase additional shares at the offering price to meet high investor demand, helping to stabilize the stock price.

Key points

• An overallotment option allowing underwriters to buy additional shares in an IPO.

• Helps stabilize stock prices post-IPO by managing supply and demand.

• Named after the Green Shoe Company, the first to use this provision.

Quick Answers to Curious Questions

It provides underwriters with the flexibility to stabilize the stock price by buying additional shares or covering short positions, reducing post-IPO volatility.

It helps maintain a stable market for the stock, protecting investors from excessive volatility immediately following the IPO.

If not exercised, the option expires, and no additional shares are issued, maintaining the originally planned share count from the IPO.