aim to stabilize market prices.
The "Pingzhun" System of the Han Dynasty
During the reign of Emperor Wu of Han, Sang Hongyang established the "Pingzhun" system to address severe price fluctuations in the market and the hoarding and profiteering by merchants.
Core Concept: "Pingzhun" means "to equalize prices." Its operation involved:
When prices were low, the government would "buy cheaply": When the price of certain commodities (like grain, salt, or iron – essential goods) fell, the official Pingzhun agencies would buy large quantities, increasing market demand. This would push prices up, protecting producers' interests and preventing prices from plummeting.
When prices were high, the government would "sell expensively": When the price of a commodity surged, the Pingzhun agencies would sell off their stored goods, increasing market supply. This would suppress price increases, ensure people's livelihoods, and combat speculation.
Purpose:
Stabilize prices: Ensure market prices remained stable, avoiding drastic ups and downs.
Combat monopolies: Prevent wealthy merchants from hoarding and manipulating the market.
Increase national treasury revenue: The government could also profit from buying low and selling high, enriching the national coffers.
Explaining the Greenshoe Operation with "Pingzhun"
Now, let's use the "Pingzhun" mindset to understand the "Greenshoe" operation:
When a company conducts an Initial Public Offering (IPO), it's like "issuing" a commodity to the market for the first time. This "commodity" is the company's stock.
Market Overheating (Prices might surge) — Similar to "Selling Expensively":
In the initial stages of an IPO, if investor demand for the company's stock is very strong, the stock price is likely to rise sharply immediately after listing. This is like a market where goods are in short supply, and prices rapidly increase.
At this point, the underwriters (acting like "Pingzhun officials") will "overallot" a portion of the shares during the IPO, typically up to 15% of the original offering size. This is somewhat like pre-preparing additional "goods" to meet potential high demand.
If the stock price does indeed rise significantly, the underwriters will exercise the "Greenshoe" option, buying these additional 15% of shares directly from the issuing company at the original IPO price. They then deliver these shares to the investors who were "overallotted." This increases the supply of stock in the market, thereby suppressing an excessive rise in stock price, preventing over-speculation, and stabilizing the price. This is similar to the "Pingzhun" agency "selling off" commodities when prices are too high.
Market Response is Flat or Weak (Prices might be sluggish) — Similar to "Buying Cheaply":
If the stock performs poorly after the IPO, perhaps even falling below its offering price, it's like a market where goods are oversupplied, and prices fall.
The underwriters, acting as "Pingzhun officials," will use the proceeds from the initial overallotment to buy back the shares that have fallen below the offering price in the open market. This helps to "fill" the "gap" created by the earlier overallotment.
This "buyback" activity increases demand for the stock, thereby supporting the share price and preventing it from falling further, maintaining investor confidence. This is similar to the "Pingzhun" agency "acquiring" commodities when prices are too low.
In summary:
"Pingzhun" was a state mechanism to stabilize the prices of physical commodities through controlled buying and selling, aiming to ensure public welfare and economic stability.
"Greenshoe" is an underwriting mechanism that stabilizes the price of newly issued stocks in their initial listing period, aiming to protect the issuer and investors and ensure a smooth IPO.
Both are essentially market intervention or regulation mechanisms. Their core philosophy is "buy low, sell high" or "increase supply to suppress prices, increase demand to support prices," all to achieve price stability and curb volatility.
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