Overallotment Explained Overallotment Explained
The underwriters of such an offering may elect to exercise the overallotment option when demand for shares is high and shares are trading above the offering price. This scenario allows the issuing company to raise additional capital.
Other times, the purpose of issuing extra shares is to stabilize the price of the stock and prevent it from going below the offering price. If the stock price drops below the offering price, the underwriters can buy back some of the shares for less than they were sold for, decreasing the supply and hopefully increasing the price. If the stock rises above the offering price, the overallotment agreement allows the underwriters to buy back the excess shares at the offering price, so that they don't lose money.