What are “green shoes” in ECM?

Green shoes refer to over-allotment options that allow underwriters to buy additional shares of a company's stock to cover excess demand during an initial public offering (IPO) or follow-on offering. This mechanism helps stabilize the stock price after the offering and provides underwriters the flexibility to manage investor demand effectively.

When a company goes public, investor interest can sometimes exceed the number of shares initially offered. The green shoe option enables underwriters to issue more shares, typically up to 15% more than the original offering size. This additional supply can help alleviate upward price pressure that the stock may experience from heightened demand, thus providing a buffer to maintain price stability in the days following the IPO.

Understanding this concept is crucial for anyone involved in ECM since it plays an important role in the execution and stability of equity offerings. The other options do not pertain to the term "green shoe," thereby highlighting the unique nature of this mechanism in managing holding and pricing during offerings.