A Business Encyclopedia

Greenshoe Option

Definition: The Greenshoe Option is a special provision in the underwriting agreement that allows the underwriter to sell more shares to the investors, than what has been planned by the issuer in the initial public offerings (IPOs).

In other words, Greenshoe option allows the underwriters or the syndicates (investment banks or brokerage agencies) to buy up to an additional 15% of company’s shares at the offering price. The Greenshoe option is legally termed as “over-allotment” in the IPO prospectus.

The underwriters exercise the Greenshoe option to stabilize the offering price of the share, in case the shares trade below or above the offering price. The underwriter works as a liaison with the company, who find the potential investors on the company’s behalf. The company and the syndicates decide the offering price jointly. Once the offering price is decided upon, the underwriter makes sure that shares do not trade below this price.

Once the shares are traded in the public, the task of an underwriter begins. If the shares trade below the offering price, called as “broke issue” or “broke syndicate bid,” the underwriter sells its 15% additional shares to the public, thereby increasing the offering size. Once the additional shares along with initial offerings are priced and becomes effective, the underwriter buys back its additional 15% shares at or below the offering price, thereby stabilizing and controlling the initial price bid.

In case, the shares trade above the offering price; the underwriters could not buy back its shares because they have to pay a higher price for the shares which were sold at the offering price in the market. Here, Greenshoe option is very helpful for the underwriters as it allows them to buy back their shares at the offering price, thereby protecting them from the losses.

Thus, Greenshoe option allows the underwriter to stabilize the share prices by increasing or decreasing the supply of shares according to public demand.

Leave a Reply

Your email address will not be published. Required fields are marked *


Related pages

define exploitivedelphi technique forecastingadvantages of virtual bankingmicrofinance meaningqueue discipline definitionlow of diminishing marginal utilitytypes of training in hrmwho is intrapreneurreinforcement theory by bf skinnermeaning of external commercial borrowinggross profit margin ratio definitionblackscholes formulafmcg products examplesbrand dilution definitionbusiness turnaround planwhat does epf meanformula for capmtreasury bills in india meaningadvantages of stable dividend policywide meaning in teluguproduction isoquantteleological examplesmeaning of stepping stonepluralist perspective definitiondefine lessor lesseemeaning of stratified samplinggordon dividend discount modeladvantages of stable dividend policyfiedlerswhat is dialectic methodvarious forecasting techniquesinduct definitionwhat is ppf schemescales defcheque explanationscientific management by taylorulterior definedefinition of kioskkai square distributionsocialization in human resource managementlock in period for ppfassumptions of the law of diminishing marginal utilitytype of imperfect marketfour characteristics of oligopolyconcentric diversificationmultistage sampling exampledefine consumer equilibriumexplicity costmarginal cost and incremental costwhat is a job enrichmentdefinition of social loafingkanban 2 bin systembrand saliencecorrelational analysiswhat is the diminishing marginal utilityteleologicallydividend growth model assumptionsordinal utility assumptionsplanning in hrmvague meaning in hindiassumptions of black scholesansoffs matrixreinforcement theory motivationdefine restructurepf epfolockbox account definitionemployee pf contributionnet asset turnover ratio analysisexamples of a laissez-faire leaderpert programmichael porter five forces analysisdefinition of oligopoly competitionrfr definitionblack sholes modelmeaning of idfhybrid debt instrument