How the 'Green Shoe' Can Give an IPO a Lift

My Tuesday column on why initial public offerings fall on their first day of trading overlooked a key factor: participation by the underwriter in the aftermarket.

I had framed the issue in very simple terms: A lack of demand, once an IPO starts trading, can cause the stock to fall below its offering price. If shares are sold to every possible buyer during the offering, no one is left to buy the stock in the aftermarket.

Reader Sarah Davidson, managing director of equity capital markets at Sanford C. Bernstein, says there's more to it than that. ...