After an IPO priced at $30 per share with a 15% overallotment option on 8 million shares, the stock drops to $27. The lead underwriter has been purchasing shares in the open market at $27-$28 to cover the overallotment short position. What is the economic impact of this strategy compared to exercising the green shoe?

Why C — The underwriter profits on the covered shares because it sold overallotment shares at $30 and is repurchasing them at $27-$28, and the issuer benefits because fewer dilutive shares are issued

When the stock trades below the offering price, the underwriter profits by covering the overallotment short position through open market purchases at the lower price (buying at $27-$28 versus the $30 at which the overallotment shares were sold). This creates a profit of approximately $2-$3 per share on the covered position. The issuer also benefits because fewer new shares are issued, resulting in less dilution for existing shareholders. This mechanism is one of the key benefits of the green shoe structure, as it aligns the interests of the underwriter with aftermarket price support.