WHAT IS A GREEN SHOE OPTION ? How is it related to an IPO ? How does it affect the current price of the share?

Question

How does the already listed shares of the company gets affected when the company opts for a green shoe option ? Answer only if you are sure.

Answer 1

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http://blog.tomevslin.com/2006/05/vonage...
http://finance.yahoo.com/personal-financ...
http://www.jvp.com/corporate/corp_faq.ht...

Answer 2

Green Shoe option is a provision which gives the underwriter the right to sell more shares than initially planned by the issuer. This usually occurs when the demand for a security issue is higher than expected, which helps smooth out fluctuations in demand and supply in an IPO.

The underwriters have thirty days in which they can buy these extra shares at the IPO price. Hence if the stock goes up, the bankers can profit by buying at the IPO price and then selling at the market price.

Of course, green shoe option would only be exercised if the trading price in secondary markets is higher than the IPO price. (Who's going to exercise an out-of-the money option, right?)

Therefore, when the underwriters are allowed the right to buy (up to a max. of 15% more shares) at the original IPO prices when the demand is high, prices for the securities in the secondary markets will naturally drop, thus help stabilizing the prices.

Definition from Yahoo Finance:
A green shoe clause allows the group of investment banks that underwrite an initial public offering (IPO) to buy and offer for sale 15% more shares at the same offering price than the issuing company originally planned to sell.

The clause is activated if demand for shares is more enthusiastic than anticipated and the stock is trading in the secondary market above the offering price.

But if demand is weak, and the stock price falls below the offering price, the syndicate doesn’t exercise its option for more shares.

This contract provision, which may be acted on for up to 30 days after the IPO, gets its name from the Green Shoe Company, which was the first to agree to sell extra shares when it went public in 1960.
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QUESTION: How is the "over-allotment option" (OAO) used in stabilizing an initial public offering (IPO)?

ANSWER: As previously noted, IPO stabilization occurs when the lead underwriter of a new issue purchases shares in the days after the IPO to prevent, or delay, a sharp decline in the stock price. Does the lead underwriter end up with a long position in the stock after stabilization? The answer in most cases is no. Then, how does the underwriter begin with a short position in the stock that is covered after IPO stabilization purchases? The short answer is the "over-allotment option" (aka the "Green Shoe option").


QUESTION: Recently we referred to a 15% over-allotment option (aka Greenshoe) for IPO underwriters. What is the maximum over-allotment option (OAO) allowed and how does that figure get set?

ANSWER: The 15% maximum over-allotment option is the standard set by the National Association of Securities Dealers (NASD). The Green Shoe Option derives its name from the first offering containing an over-allotment option underwritten by Paine, Weber, Jackson & Curtis for the Green Shoe Manufacturing Company (later renamed Stride-Rite Corporation) in October, 1960.

The original Green Shoe Company over-allotment option was equal to 10%; however, underwriters quickly discovered the value of having a contingent short position in an IPO. In recent years, very few deals are done without an over-allotment option.

Answer 3

Green Shoe Clause