overallotments

An overallotment, often referred to as a "green shoe," is a provision in an underwriting agreement that allows investment banks to sell more shares of a security than were originally registered in an initial public offering (IPO) or secondary offering. This is typically done when demand for the shares is expected to exceed the initial supply.

The underwriters can sell up to an additional 15% of the shares offered. This extra allowance helps stabilize the stock price after it begins trading. If the stock price falls below the offering price in the aftermarket, the underwriters can buy back the excess shares on the open market to support the price. Conversely, if the stock price rises above the offering price, the underwriters can exercise their overallotment option to purchase additional shares from the issuer at the offering price, effectively covering their short position and making a profit.

The term "green shoe" originates from a 1919 IPO by the Green Shoe Company, where the underwriters first employed this strategy. Overallotments are a common practice in capital markets and provide a mechanism for managing price volatility during the crucial period immediately following an offering. They offer flexibility to underwriters and can benefit both issuers and investors by promoting a more orderly market.