The Green Shoe Provision

Many underwriting contracts contain a Green Shoe provision (sometimes called the overallotment option), which gives the members of the underwriting group the option to purchase additional shares from the issuer at the offering price.7 Essentially all IPOs and SEOs include this provision, but ordinary debt offerings generally do not. The stated reason for the Green Shoe option is to cover excess demand and oversubscriptions. Green Shoe options usually last for about 30 days and involve no more than 15 percent of the newly issued shares.

The Green Shoe option is a benefit to the underwriting syndicate and a cost to the issuer. If the market price of the new issue goes above the offering price within 30 days, the Green Shoe option allows the underwriters to buy shares from the issuer and immediately resell the shares to the public.

Green Shoe provision

A contract provision giving the underwriter the option to purchase additional shares from the issuer at the offering price. Also called the overallotment option.

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