The Green Shoe Provision, also known as the over-allotment option, is a critical tool used in Initial Public Offerings (IPOs) to ensure price stability and balance supply-demand dynamics in the early stages of a stock’s public trading. Named after the Green Shoe Manufacturing Company, which was the first to use this provision, it enables underwriters to stabilize the market price of shares and mitigate volatility.

The Green Shoe Provision allows underwriters to issue additional shares, typically up to 15% more than the original offering size, to meet excess demand. This mechanism is activated when the stock's demand surpasses expectations, leading to rapid price increases. By releasing additional shares, underwriters enhance the supply, preventing unsustainable price surges and stabilizing the market.

In scenarios where the stock price declines below the offering price after the IPO, the Green Shoe Provision also supports price stabilization. In such cases, underwriters repurchase shares from the open market at a reduced price, effectively creating a price floor and boosting investor confidence. This dual functionality makes the Green Shoe Option an indispensable tool in managing IPO dynamics. The Green Shoe Provision plays a pivotal role in ensuring a smooth transition of stocks to public markets by mitigating extreme price movements and enhancing market stability.