GREENSHOE Meaning and
Definition
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A greenshoe is a financial term that refers to an option offered to underwriters by a company during an initial public offering (IPO) of its stock. It allows the underwriting syndicate to purchase additional shares from the issuer at the offering price, effectively creating a short position. The option is granted by the company to the underwriters, usually an investment bank, and it allows them to stabilize the stock price in the secondary market.
The greenshoe option provides the underwriters with the ability to cover any short position that may arise if demand for the newly issued shares exceeds the amount originally allocated. By exercising this option, the underwriters can purchase additional shares at the offering price, typically within a 30-day period, to fulfill the excess demand. This process helps prevent the stock price from experiencing significant fluctuations and increases the chances of a successful IPO.
The term "greenshoe" is derived from the first company to use this option, the Green Shoe Manufacturing Company, which was active in the 1920s-1930s. The company is credited with initiating this method of stabilizing share prices during IPOs. However, the term "greenshoe" has become synonymous with such an option regardless of the issuing company.
Overall, the greenshoe option is a mechanism to reduce risk for both the issuer and underwriter during an IPO, ensuring a smoother process while maintaining stability in the secondary market for newly issued shares.
Common Misspellings for GREENSHOE
- greensoe
- freenshoe
- vreenshoe
- breenshoe
- hreenshoe
- yreenshoe
- treenshoe
- geeenshoe
- gdeenshoe
- gfeenshoe
- gteenshoe
- g5eenshoe
- g4eenshoe
- grwenshoe
- grsenshoe
- grdenshoe
- grrenshoe
- gr4enshoe
- gr3enshoe
- grewnshoe
Etymology of GREENSHOE
The term "greenshoe" originates from the practice of exercising an overallotment option in the financial industry. It is directly related to the color of a traditional green shoe, and not directly connected to the color green in the context of environmentalism or sustainability.
The term "greenshoe" was first used in 1962 during the initial public offering (IPO) of the Green Shoe Manufacturing Company. The company was named after its founder, Benjamin Green, rather than the actual color. Green Shoe Manufacturing Company introduced the concept of an overallotment option in underwriting agreements, allowing the underwriters to sell more shares to the public than initially agreed upon.
The name "greenshoe" came into existence simply because the law firm handling the IPO of Green Shoe Manufacturing Company happened to be called "Greenbaum, Doll & McDonald".
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