A greenshoe choice, technically understood as an over-assignment option, is a condition in an underwriting contract that permits an issuer to issue extra shares, generally up to 15% of the originally proposed payment. This choice is exerted if there is an increased public need for the shares, surpassing the available amount.
What Exactly Is GreenShoe?
The word “greenshoe” comes from the Green Shoe Manufacturing Company, which was the foremost to include this clause in its IPO. Way back in 1960, the Green Shoe Manufacturing Company went public and employed the greenshoe option to stabilise its stock cost. The IPO underwriters can trade more shares than originally intended, managing oversubscription and also stabilising the stock’s price. The greenshoe option can be used if demand exceeds available shares, underwriters can release a higher percentage of shares to meet the surplus demand. This flexibility helps manage the risks associated with IPOs and provides companies with greater control during their initial public offering.
Conclusion
The green shoe option is now a common practice in IPOs, providing a mechanism to stabilise stock prices and manage oversubscription. It remains a critical tool for ensuring successful initial public offerings.