Dutch or Uniform Price Auction Example
The company wants to sell 1,500 shares of stock.
The firm will sell 1,500 shares at $15 per share.
Bidders A, B, C, and D will get shares.
Bidder Quantity Bid
A 500 $20
B 400 18
C 250 16
D 350 15
E 200 12
Bidder Quantity Bid Σ Qty
A 500 $20 500
B 400 18 900
C 250 16 1,150
D 350 15 1,500
E 200 12 1,700
With Dutch auction underwriting, the underwriter does not set a fixed price for the shares to be sold.
Instead, the underwriter conducts an auction in which investors bid for shares. When the auction closes,
bidders are listed in descending order of price bid.
Bidder A is willing to buy 500 shares at $20 each.
Bidder B is willing to buy 400 shares at $18 each.
Bidder C is willing to buy 250 shares at $16 each.
Bidder D is willing to buy 350 shares at $15 each.
Bidder E is willing to buy 200 shares at $12 each.
$15 is the highest price at which the company can sell the desired number of shares.
Slide 13
15-13
Green Shoe Provision
• “Overallotment Option”
• Allows syndicate to purchase an additional 15% of the issue from the issuer
• Allows the issue to be oversubscribed
• Provides some protection for the lead underwriter as they perform their price stabilization function
• In all IPO and SEO offerings but not in ordinary debt offerings
The Aftermarket – Trading period after a new issue is initially sold to the public.
Many underwriting contracts contain a Green Shoe provision (sometimes called the overallotment option),
which gives the members of the underwriting group the option to purchase additional shares from the issuer
at the offering price (i.e. the stated reason for the Green Shoe option is to cover excess demand and
oversubscriptions).
The term Green Shoe provision sounds quite exotic, but the origin is relatively mundane. The term comes
from the name of the Green Shoe Manufacturing Company, which, in 1963, was the first issuer that granted
such an option.
The Green Shoe provision allows the underwriters to purchase additional shares (up to 15% of the issue) at
the original price up to 30 days after the initial sale. This provision is used primarily when an offering goes
well and the underwriters need to cover their short positions created by overallotment of the issue. See the
references provided above for more information.
In practice, usually underwriters initially go ahead and sell 115 percent of the shares offered. If the demand
for the issue is strong after the offering, the underwriters exercise the Green Shoe option to get the extra 15
percent from the company.