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Walid Busaba is a Professor of Finance, and the former Bank of Montreal Professor, at the Ivey Business School. Prior to Ivey, Professor Busaba was on the faculty at the Eller College of Business of the University of Arizona and a visiting faculty at the Carlson School of Management of the University of Minnesota. He received a BBA (with Distinction) and an MBA from the American University of Beirut, an MA in Economics (with Academic Excellence Award) from the University of North Carolina-Greensboro, and a Ph.D. in Finance (with Outstanding Academic Performance Award) from Boston College. Professor Busaba’s industry experience includes Auditing and Financial Management.
Professor Busaba's research focuses on investment banking, corporate finance, and financial contracting. His current research examines the intermediary role of underwriters, the timing of initial public offerings, the capital raising experience of foreign-listed Chinese companies, and the determinants of the maturity and renegotiation of late 19th Century mortgages. Professor Busaba’s research has been supported by grants from the Social Sciences and Humanities Research Council of Canada, published in the leading finance journals, and presented at leading business schools and at the annual meetings of the major finance associations.
Professor Busaba’s teaching portfolio includes Core Finance, Investments, International Finance, and Derivative Securities and Risk Management at both the undergraduate and MBA levels, MBA Advanced Corporate Finance, and a Ph.D. course in Corporate Finance. He is the recipient of the Dean’s Commendation for teaching excellence at Ivey and the Award of Excellence, University Student Council Teaching Honour Roll at Western University. While at the University of Arizona, he received a Faculty Appreciation Award from the Business and Public Administration Student Council.
Professor Busaba served on the Investment Committee of Foundation Western, Western University, from 2009 until 2013. He served as the Ph.D. coordinator for the Finance Area Group at Ivey from 2004 until 2009, and as the Area coordinator during 2010 and 2011. While at Arizona, he served as the Ph.D. coordinator for the finance department, as the Finance Honours Advisor, and as the Finance Department representative in the University Library Council. He also acted as a Judge of business plans in the Entrepreneurial program. Professor Busaba has reviewed tenure cases for several schools, articles for the leading finance journals, and applications for granting agencies.
Abstract: We investigate the effect of the “7% solution”—the fact that underwriters in the U.S. charge a 7% spread to most IPOs between $20 million and $100 million in size—on the ensuing pricing of the offerings. Our identification exploits the variation in spreads that is due to distinct kinks in the relation between spread and offer size at these two thresholds. We find that the spread positively influences underpricing but also the offer-price adjustment from the filing range’s midpoint. Our evidence indicates that the spread influences the aftermarket price, suggesting that underwriters can shape, not merely discover, investor valuations.
Abstract: We examine whether underwriters price-up weakly-demanded IPOs to prevent withdrawal. Our empirical strategy exploits a discontinuity in the distribution of IPO prices around the low boundary of the filing range. Offerings with a high ex-ante withdrawal probability that are priced at this boundary are likely priced-up to meet issuers’ reservation prices. We compare the aftermarket returns of these IPOs to the returns of other weakly-demanded offerings where issuers’ reservation prices were likely not binding, and identify a negative 8.4-percentage point differential attributable to the aggressive pricing inherent in setting the price at the low boundary when withdrawal risk is high.
Abstract: The IPO filing volume is positively related to changes in market volatility, especially when market returns are at normal’ levels. This is consistent with the view that filing with the SEC gives would-be issuers an option’ on market valuations. Creating this option is attractive not only when market valuations rise but also when volatility increases, and the effect of volatility is more pronounced when market returns are neither high nor low. We therefore identify a distinct type of window of opportunity’ for firms attempting to go public, characterized not particularly by strong stock valuations but by increased volatility in valuations.
Abstract: An interesting phenomenon for Chinese firms that list their stock both in China and abroad is that the overwhelming majority had gone public, and listed, abroad first. We find that when these companies return to China to issue stock and list, they experience poorer post-issuance stock and operating performance in comparison to purely domestic issuers. Also, they raise more funds relative to their sales, leave less money on the table for investors, and incur lower direct flotation costs. Among returning firms, those which raise higher proceeds relative to sales experience poorer long-run stock performance and lower Tobin’s q post issuance. Our results offer a new perspective on cross-listing, which we term dressing-up-for-premium. Firms from less-developed markets take advantage of the enhanced visibility and prestige associated with the foreign listing to issue shares domestically at inflated prices and favorable terms, and to raise greater proceeds than they can efficiently use.
Abstract: Investors who possess information about the value of an IPO can participate in the offering as well as trade strategically in the aftermarket. Both the bookbuilding and the fixed price IPO selling methods require more underpricing when aftermarket trading by informed investors is considered. Bookbuilding becomes especially costly, since the potential for profit in the aftermarket adversely affects investors' bidding behavior in the premarket. Unless the underwriter can restrict its bookbuilding effort to a small enough subset of the informed investors, a fixed price strategy that allocates the issue to retail investors produces higher proceeds on average, contrary to the conventional wisdom in the literature. We therefore find a benefit to limiting access to the premarket and, hence, provide an efficiency rationale for the practice by American bankers of marketing IPOs to a select group of investors. We also provide unique policy and empirical implications.
Abstract: Why is the issuer's reservation price not disclosed in bookbuilding? We analyze the differential effect of reservation price disclosure on the underpricing required to elicit truthful' indications of interest from investors. We find that a policy of disclosure would increase proceeds for firms with a reservation price sufficiently high relative to possible investor valuations of the shares, but would decrease proceeds for issuers with lower reservation prices. The former group is likely to be absent from the IPO market, explaining why secrecy in reservation prices is the norm.
Abstract: The ability to withdraw IPOs when demand is weak increases expected proceeds and provides issuers with option value. To enhance this value, the SEC adopted in 2001 the public-to-private' safe harbor Rule 155 and simplified Rule 477 for withdrawing offerings. The option value can exceed the underpricing associated with soliciting investor demand. Hence, issuers might prefer bookbuilding despite the associated underpricing even if they could sell via fixed price at full expected value. The option value increases faster than underpricing with ex ante uncertainty, generating predictions regarding the use of bookbuilding and the timing of IPOs, and leading to a distinct theory of hot IPO markets.
Abstract: Firms that go public produce information that influences the production decisions of their rivals as well as their own. If information-production costs are borne primarily by pioneering firms, market failures can occur in which both pioneers and followers remain private and make ill-informed investment decisions. Solving this coordination problem requires a transfer between pioneers and followers that leads to a more equitable distribution of information-production costs. We contend that investment banks can enforce such a transfer by effectively bundling IPOs within an industry. This suggests an explanation for clustering of IPOs through time and within industries.
Abstract: American IPOs are priced after a process of bookbuilding, during which issuers can withdraw at any time. It is hypothesized that the option to withdraw reduces underpricing by strengthening the issuers' bargaining power with respect to investors. Empirical analysis reveals that underpricing is lower when investor perception of an IPO's likelihood of withdrawal is higher. Withdrawing issuers are neither smaller nor less profitable than issuers completing their IPOs, and engage underwriters that are as reputable as those managing completed offerings. Withdrawal is correlated with leverage, intended use of proceeds, expected issue size, venture backing, revenues, NASDAQ returns, and IPO activity.
Abstract: We compare two mechanisms for selling IPOs, the fixed price method and American book-building, when investors have correlated information and can observe each other's subscription decisions. In this environment, the fixed price method is a strategy that can create cascading demand. Alternatively, and underwriter building a book aggregates investor information into the offer price. We find that bookbuilding generates higher expected proceeds but exposes the issuer to greater uncertainty, and that it provides the option to sell additional shares that are not underpriced on the margin.
Abstract: We compare two mechanisms for selling IPOs, the fixed price method and American book-building, when investors have correlated information and can observe each other's subscription decisions. In this environment, the fixed price method is a strategy that can create cascading demand. Alternatively, an underwriter building a book aggregates investor information into the offer price. We find that bookbuilding generates higher expected proceeds but exposes the issuer to greater uncertainty, and that it provides the option to sell additional shares that are not underpriced on the margin.
Abstract: Underwriters have an incentive to overstate investor interest in order to persuade some investors to purchase shares at a price in excess of their initial estimate of the fair value. We show that this incentive is eliminated when the underwriter commits to secondary market price stabilization. Destroying the underwriter's incentive to overstate interest reduces the total surplus captured by initial investors in initial public offerings. Further efficiency gains are associated with penalty bid systems that permit the underwriter to make the stabilization commitment selectively. Price stabilization can thus be viewed as a bonding mechanism that improves the efficiency of the primary equity market.
