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Green shoe Option
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A provision contained in an Underwriting agreement that gives the underwriter the right to sell investors more shares than originally planned by the issuer.
If the demand for a Security issue proves higher than expected green shoe Option is executed. Legally referred to as an over-allotment Option.
This 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. Green shoe options typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions Warrant such action. However, some issuers prefer not to include green shoe options in their Underwriting agreements under certain circumstances, such as if the issuer wants to fund a specific project with a fixed amount of cost and does not want more capital than it originally sought.
The term is derived from the fact that the Green Shoe Company, NOW called Stride Rite Corporation, which was the first company to permit this practice to be used in an offering.
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Privatebanking.com
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