I'm just wondering, if following an IPO the share price goes up and the underwriter calls the option, where do those extra 15% shares come from?

Does the company have to issue more stock to cover the option, or are those stocks originally issued anyways but just not sold? (in which case, do they sell them afterwards?)

And also, are Greenshoe options public information?



Yes, the greenshoe option, technically called overallotment option is described in the prospectus.

Yes, in the event the greenshoe option is exercised by the underwriters, the company issues additional shares and receives additional proceeds. Essentially it is as though a small secondary offering took place.

  • $\begingroup$ Isn't that "unfair" to the initial buyers? If their positions are more diluted than what they thought at first, their EPS would go down no? $\endgroup$ Aug 15 '15 at 2:14
  • $\begingroup$ Yes. It is as though you think you are buying a 250 gram bar of chocolate for 1 USD, then you find out you are only getting 212.50 grams. ;-) $\endgroup$
    – Alex C
    Aug 15 '15 at 2:19
  • $\begingroup$ More seriously, it depends whether the company can use the extra money to generate additional earnings or not. But I share your concern. $\endgroup$
    – Alex C
    Aug 15 '15 at 2:22

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