What Does Green Shoe Mean?
A green shoe is a legal way for companies to stabilize the initial share price of their public offerings. It is a clause included in the underwriting agreement of a company’s IPO that permits the underwriters to sell up to 15% more shares than the initial amount set by the issuer.
Divestopedia Explains Green Shoe
Green shoe is legally referred to as the over-allotment option, but is commonly called green shoe because this tactic was first used by a company called Green Shoe.
When a company has an initial public offering of their shares, there is a chance that demand for these new shares will surge and cause undesirable price fluctuations. With the green shoe option, prices can be better stabilized because the underwriter has the permission to sell additional shares as needed, up to 15% more than the originally allocated amount.