Expert Interpretation: What Is "Green Shoe Mechanism" (2)

China's market:

The formation and application of green shoe mechanism is

First of all, the stock price will play a role of maintaining stability within a certain period after the listing of shares.

After the listing of stocks, investors can use the green shoe mechanism to ask the issuers to issue additional shares when the stock price rises.

The increase in stock supply has stabilized the bull market share price and even lowered the share price, which is close to the issue price.

When investors fail to respond well, the stock price falls below the issue price, and the Underwriters can use the funds raised by the green shoe mechanism to buy the issuer shares from the two tier market. The increase in stock demand prevents the stock price from falling and even moves the price up, close to the issue price.

In this way, the supply of shares issued in the primary market is closer to market demand and increases the market liquidity of the stock, thus making the price discovery process more stable, reducing the fluctuation after the IPO and maintaining the stability of the stock price.

Second, underwriting risk of leading Underwriters will be reduced.

Market-based issuance exposes major underwriters to greater risks.

The issue price is a high intelligent work that tests the pricing level of the main underwriter, which requires the rapid change of the issuer and the lead underwriter in adapting to the market.

The overpriced issue will lead the underwriters to suffer economic losses.

When the green shoe mechanism is used, during the exercise period, if the stock price exceeds demand after listing, the Underwriters will certainly not have to buy over the allotment shares; if the price is too high, the market is insufficient to subscribe, and the share price will fall below the issue price, the Underwriters can repurchase the new shares from the centralized auction market at a price not higher than the issue price, and sell the stock to the investors who offer the subscription, so that the share price moves upward, forming a certain supporting role for the stock price.

Therefore, in most cases, the stock price will run near the issuing price or the issuing price, and the possibility that the share price will fall below the issuing price will be greatly reduced.

This will reduce the loss that the underwriter may make in the first mistake, release the risk of underwriting, improve the ability of the underwriter to control the market and resist the risk of issuance, and maintain the image of the issuer and the main underwriter, so as to ensure the success of the issue.

Again,

At present, the supply of new shares in the primary market of the stock market in China is in short supply, and the share prices in the two tier market have mostly risen.

In this case, with the green shoe mechanism, the lead underwriter can ask the issuer to issue additional shares so that the issuer can get the funds raised by issuing the new part.

This makes the number of issuers' financing flexible and provides greater opportunities for the development of listed companies.

Finally, we should curb the speculative atmosphere in the primary market and reduce the fluctuation of the two level market.

At present, a huge amount of capital has been hoarding and hoarding in the primary market for the purchase of new shares. The market speculation atmosphere is serious, which is not conducive to the stable development of China's securities market.

The number of new shares issued by the green shoe mechanism can be 15% more than that when it was not implemented. This will help underwriters make corresponding decisions according to the specific circumstances of the market, or require issuers to issue new shares or buy stocks from the two market, with strong flexibility and strong reversibility.

On the one hand, it will help stabilize the price fluctuation of the two tier market, and make the price of the two tier market conform to the issue price of the first class market, reduce the price difference of the one or two market, play a role of dredging the funds for the purchase of new shares in the primary market, and objectively play a role in suppressing the speculation in the primary market; on the other hand, it is also conducive to the stability of the stock price in the bull market and the bear market, reducing the fluctuation of the stock index, and is conducive to the stability of the stock market and the steady development of the stock market.