Question

a. What is the role of the investment bank / underwriter

b. Why the greenshoe option exists

c. When the greenshoe option would be exercised

d. Where the shares being sold during the IPO are coming from

e. What do average first-day returns look like over time

Answer 1

a) Role of the investment bank or underwriter is to provide securities (IPOs) to the market. It makes sure investors know about the securities and takes responsibility of distributing the securities. In event that securities are not all sold, it may also buy unsold securities.

b) A greenshoe option in underwriting agreement of an initial public offering (IPO) that allows underwriters to buy up to an additional 15% of company shares at the offering price.

c) Greenshoe option shall be exercised when the price of shares are more thna the offering prices post IPO.

d) Shares sold in IPO are the primary shares created by the company as per total allowed shares in the charter.