An over-allotment option that allows underwriters to sell up to 15% additional shares if demand exceeds expectations during an IPO. It helps stabilize the stock price and manage excess demand.
Named after the Green Shoe Manufacturing Company (now Stride Rite), which first used this mechanism in its 1960s IPO. The term became standard terminology in investment banking as this stabilization tool became widely adopted.
The greenshoe option is like having a pressure release valve for hot IPOs - it prevents the stock from skyrocketing on day one only to crash later when reality sets in. It's a win-win that gives investors more shares if they want them and stabilizes pricing!
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