A green shoe clause allows the group of investment banks that underwrite an initial public offering (IPO) to buy and offer for sale 15% more shares at the same offering price than the issuing company originally planned to sell.
The clause is activated if demand for shares is more enthusiastic than anticipated and the stock is trading in the secondary market above the offering price.
But if demand is weak, and the stock price falls below the offering price, the syndicate doesn't exercise its option for more shares.
This contract provision, which may be acted on for up to 30 days after the IPO, gets its name from the Green Shoe Company, which was the first to agree to sell extra shares when it went public in 1960.
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