Green Shoe Underwriter Strategy.
When a company has agreed to a green shoe, who does the underwriter buy shares from if the share price drops? Who do they buy shares from if the share price increases?
In the context of an initial public offering (IPO), a green shoe option (also known as an over-allotment option) is a provision that allows the underwriter to issue and sell more shares than originally planned, up to a specified amount. The purpose of a green shoe is to provide the underwriter with some flexibility to stabilize the share price in the aftermarket, which is the period after the IPO when the shares begin trading in the secondary market.
If the share price drops after the IPO, the underwriter can exercise the green shoe option and buy additional shares from the issuer at the offering price. This allows the underwriter to increase the number of shares available for trading in the secondary market, which can help support the share price and prevent it from dropping further. The underwriter typically buys these additional shares from the company that went public.
If the share price increases after the IPO, the underwriter can sell the additional shares that it has acquired through the green shoe option to investors in the secondary market at the prevailing market price. The underwriter makes a profit on the difference between the offering price and the market price, minus any fees and expenses associated with the green shoe option. In this case, the underwriter typically buys the additional shares from investors who are willing to sell their shares in the secondary market. |
