Greenshoe (Overallotment Option)
Definition
The greenshoe is an option granted by the issuer (or selling shareholders) allowing underwriters to sell up to an additional ~15% of the base offering size, exercisable for a period after pricing (customarily around 30 days). It is named after Green Shoe Manufacturing, the first company to use it, and is formally the overallotment option.
Its function is price stabilization. Underwriters typically overallocate the deal by the greenshoe amount, creating a short position. If the stock trades down, they buy shares in the market to cover the short — supporting the price. If the stock trades up, they exercise the greenshoe to obtain shares from the issuer at the offer price (less the spread) to cover, capping their risk.
This is one of the few permitted forms of price stabilization in US offerings, conducted under Regulation M.
Why interviewers ask
A classic ECM technical: 'what is a greenshoe and how does it stabilize the price?' Many candidates can name it but few can explain the short-position mechanics — walking through both scenarios (stock up: exercise the option; stock down: buy in the market) is what earns full credit.
Related terms
Interviews don't test definitions — they test recall under pressure.
Drill 1,500+ real questions with spaced repetition. Free to start — 10 reps a day on the house.