An offering in which the company issuing securities agrees to issue an additional 10 percent or 15 percent of an offering to their underwriters in order to accommodate strong demand. The lead underwriter will distribute the shares to the members of the underwriting group in proportion with their orders at the issuing price. Also called overallotment option.
In order for an underwriter to actually sell the intended number of shares of common stock in an offering, it may have to make commitments to sell a larger number of shares. For example, if there are 100,000 shares to be sold, commitments will be made for 110,000 shares. Brokers often overcommit because a certain number of potential purchasers will likely change their mind when the shares are actually offered. To cover themselves in those cases where purchasers commit for more than the 100,000 shares, the underwriter arranges with the company to purchase additional shares. A 15 percent maximum overallotment option is the standard set by the National Association of Securities Dealers.
The name is derived from the first offering containing an overallotment option, underwritten by Paine, Webber, Jackson & Curtis for the Green Shoe Manufacturing Company in October 1960. Very few offerings are done without an overallotment option.