Greenshoe
Investment Banking glossary · Restructuring (RX), DCM, & ECM
Definition
Overallotment option that lets IPO underwriters sell up to 15% additional shares within 30 days of pricing. Mechanics: the underwriters initially short-sell 115% of the base offering. If the stock trades up, they exercise the greenshoe at the IPO price to cover the short (the issuer issues the extra shares). If the stock trades down, they cover by buying in the open market, creating buying pressure that stabilizes the price — making the greenshoe the primary post-IPO price-stabilization tool.
Greenshoe in plain English
When a company first sells shares to the public (an IPO), nobody knows if the price will hold, so the greenshoe is a built-in safety valve for the banks running the sale. The banks are allowed to sell about 15% MORE shares than planned; if the stock is popular and rises, they let the company create those extra shares and everyone wins, but if the stock sags, they buy shares back in the market to prop the price up — that buying is what steadies a shaky debut. Think of a concert promoter who oversells a few seats: if demand is huge they open the balcony, and if it's weak they quietly buy tickets back so the show doesn't look empty. The odd name comes from the Green Shoe Manufacturing Company, the first firm to use it.
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Practice Greenshoe
What is the total number of shares sold to the public in this offering?
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