Green Shoe Option

Definition:

The option of the underwriter to call for further securities (typically up to 15% of the issue) to cover the underwriter for the shares it has over-allotted in the event that the market price of the shares is higher than the Strike Price (typically the subscription price of the offering). A Green Shoe Option is used as a price stabilization mechanism. However, alternative structures may be used to conform to local legal systems, particularly in emerging markets. The term stems from the first exercise of such an option by The Green Shoe Company. Also referred to as an Over-Allotment Option.

The phrase “refreshing the Green Shoe” means to cover the initial overallotments with the market purchases, but nevertheless to also exercise the Green Shoe Option to cover any syndicate short positions created by the initial overallotment.

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