Reverse Greenshoe

A reverse greenshoe is a financial mechanism used during an initial public offering (IPO) to stabilize the price of the newly issued shares. Unlike a traditional greenshoe, where underwriters can purchase additional shares if demand is high, a reverse greenshoe allows underwriters to buy back shares if the price falls below the offering price, helping to support the stock’s price. This mechanism is used to prevent sharp declines in the stock price after an IPO and provide a safety net for the issuing company.

Example

During an IPO, the underwriters exercise the reverse greenshoe option by buying back shares in the open market when the stock price falls below the offering price, helping to stabilize the price.

Key points

• A financial tool used to stabilize stock prices after an IPO.

• Allows underwriters to buy back shares if the price falls below the offering price.

• Provides a safety net to prevent sharp declines in stock prices.

Quick Answers to Curious Questions

Why is a reverse greenshoe used in IPOs?

It helps stabilize the stock price by allowing underwriters to buy back shares if the price drops below the offering price, preventing excessive volatility.

How does a reverse greenshoe differ from a traditional greenshoe?

A traditional greenshoe allows underwriters to sell additional shares if demand is high, while a reverse greenshoe enables them to buy back shares if prices fall.