A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO) that gives the underwriter the right to sell investors more shares than originally planned by the issuer. It typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. This would normally be done if the demand for a security issue proves higher than expected.
Dec 28 2013 11:45 AM
A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.