A provision letting underwriters sell up to an additional 15% of shares beyond the original offering size, if demand is strong — named after Green Shoe Manufacturing, the first company to use it. It gives underwriters a tool to help stabilize the stock's price shortly after trading begins.
A fully exercised greenshoe signals strong investor demand, since underwriters only use it when buy orders exceed the base offering size. It also hands underwriters a built-in tool to support the stock in its first weeks of trading — buying shares back if the price dips below the offer price — which is one reason newly listed stocks sometimes trade unusually close to their IPO price at first.
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