Green shoe is an option to issue additional shares if, in conjunction with a new placement, demand exceeds supply: if a new issue is oversubscribed, the green shoe is used to satisfy excess demand or to stabilize the trading price.
The issuing company gives the lead bank an option for more shares under the original terms. In this way, the bank can ultimately issue more shares than originally planned. Investors who have subscribed for the shares get the additional shares at the issue price.
The issuer and syndicate banks determine the green shoe amount before the IPO. The number of securities in the reserve is noted in the issue prospectus. The additional shares generally come from the original owners. They can, however, be financed by an increase in capital.
The term comes from the US company Green Shoe Manufacturing, which was the first to utilize the method.
Synonym: oversubscription option