Greenshoe, or over-allotment clause, is the term commonly used to describe a special arrangement in a U.S. registered share offering, for example an initial public offering (IPO), which enables the investment bank representing the underwriters to support the share price after the offering without putting their own capital at risk.[1] This clause is codified as a provision in the underwriting agreement between the leading underwriter, the lead manager, and the issuer (in the case of primary shares) or vendor (secondary shares).[2] The provision allows the underwriter to purchase up to 15% in additional company shares at the offering share price.[3][1]
The term is derived from the name of the first company, Green Shoe Manufacturing (now called Stride Rite), to permit underwriters to use this practice in an IPO.[4]
The use of the greenshoe (also known as "the shoe") in share offerings is widespread for two reasons. First, it is a legal mechanism for an underwriter to stabilize the price of new shares, which reduces the risk of their trading below the offer price in the immediate aftermath of an offer—an outcome damaging to the commercial reputation of both issuer and underwriter. Secondly, it grants the underwriters some flexibility in setting the final size of the offer based on post-offer demand for the shares.