Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Green Shoe Option

What it is:

A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). Also known as an over-allotment provision, it allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price.

How it works (Example):

As the underwriter has the ability to increase supply if demand is higher than expected, a greenshoe option can create price stability during an IPO.

Some IPO agreements do not include greenshoe options in their underwriting agreements. This is usually the case when the issuer wants to fund a specific project at a pre-determined cost and does not want to be responsible for more capital than it originally sought.

Why it Matters:

A green shoe option can create greater profits for both the issuer and the underwriting company if demand is greater than expected.  It also facilitates price stability.

The Green Shoe Company, now called Stride Rite Corp., was the first issuer to allow the over-allotment option to its underwriters, hence the name.

Related Terms View All
  • Garnishment
    Let's say John Doe has stopped paying child support to his ex-wife. His ex-wife takes him...
  • War Babies
    Let's assume Company XYZ builds jets for the Navy, and Company ABC builds guns for the...
  • Icahn Lift
    Carl Icahn was a corporate "raider" in the 1980s and made millions buying and selling...
  • Market Is Off
    If a market index declines from its closing value on the previous business day, people...
  • Vertical Market
    Let’s assume XYZ Company manufactures a special kind of medical glue. The glue only works...