Glossary
Greenshoe Option
An overallotment option that lets underwriters issue up to 15% additional shares at the offer price.
The greenshoe — formally an overallotment option — gives the underwriting syndicate the right to sell up to 15% additional shares at the IPO offer price. In practice, the syndicate typically sells the shares short into the market on listing day and then either covers the short by buying shares (supporting the price if it falls) or by exercising the greenshoe (if the price holds above the offer).
The name comes from Green Shoe Manufacturing, the first company to use the structure in 1963. The mechanic is now standard in nearly every US IPO and exists primarily to allow the syndicate to stabilize the aftermarket price.