Expert Interpretation: What Is "Green Shoe Mechanism" (1)

"Green shoe mechanism" is also called.

Mechanism sources

"Green shoes" is named after the United States is known as the Boston green shoe manufacturing company's first public offering (IPO) in 1963. It is the common name of the over allotment option system.

Green shoe mechanism is mainly used in the market atmosphere is not good, the result is not optimistic or unpredictable.

The purpose is to prevent the share price from falling to the issuing price or issuing price after the IPO is released, enhancing the confidence of investors participating in the primary market subscription, and achieving the smooth pition of the new share price from the primary market to the two level market.

The adoption of "green shoes" can regulate the scale of financing according to market conditions, so as to make the supply and demand balance.

major function

Its functions are as follows: underwriters can choose 15% shares (usually not more than 15%) at the same issue price within 30 days from the date of stock listing.

This function is reflected in the following: if the price of the issuer's shares is lower than the issuing price, the funds acquired by the principal underwriters in advance over the sale of shares will be purchased from the two tier market at a price not higher than the issuing price, and then allocated to investors who have raised the subscription price. If the price of the issuer's shares is higher than the issuing price, the principal underwriter will ask the issuer to issue 15% of the shares and assign to the investors who have made the subscription in advance, and the new issue funds will be owned by the issuer, and the additional part will be counted as part of the number of the issue shares.

Obviously, the introduction of green shoe mechanism can stabilize the stock price of new shares.

Therefore, in the future, the phenomenon of rapid rise or fall will be suppressed within 30 days after the listing of the new green shoe mechanism, and the price fluctuation at the beginning of its listing will be somewhat convergent.

Principle of action:

Excess allotment option refers to the issuer's option to grant the principal underwriter a period of time after the listing of the shares.

In accordance with the established practice, the authorized underwriter sells the shares at an excess of 15% of the underwriting amount at the same issue price, that is, the principal underwriter shall sell the shares to investors at no more than 115% of the underwriting amount.

Within 30 days from the date of the issuance of the underwriting part, when the share price rises, the main underwriter exercises the green shoe option at the issue price, and purchases the excess 15% stock from the issuer in order to wash off the excess of his own sale and charge the excess sale price.

At this point, there is no need to pay high price to buy the market, it is only necessary for issuers to issue more corresponding shares to Underwriters.

The actual number of issuance is 115%.

When the share price falls, the main underwriter will not make the option. Instead, he will repurchase excess stock from the two tier stock market to support the price and hedge the short end (Ping Cang) in order to earn the middle price difference.

At this point, the actual quantity of issue is equal to the original quantity, that is, 100%.

As the market price is lower than the issue price, the underwriter will not lose.

Practical application

Exercising excess allotment rights can be more capital for listed companies. For underwriters, they can obtain more underwriting fees in proportion, which is conducive to the successful issuance of new shares, and to some extent, protect the interests of investors.

Therefore, it is a win-win arrangement.

Another added effect is that over allotment stocks are generally allocated to investors closely related to the underwriting group. Because the placement price is consistent with the issue price and lower than the market price, investors can make a profit, and the lead underwriter can further consolidate the relationship with the consortia.

In the case of permission to sell short, if the excess placement is not approved by the issuer, it is known as "BareShoe". Once the share price rises, the underwriter will have to repurchase the shares which he has over allotment at the price above the issue price, thereby suffering economic losses.