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Decision Support for IT Investment Projects

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dc.contributor.authorMüller, Marcel Philipp
dc.contributor.authorStöckl, Sebastian
dc.contributor.authorZimmermann, Steffen
dc.contributor.authorHeinrich, Bernd
dc.date.accessioned2018-01-08T07:46:22Z
dc.date.available2018-01-08T07:46:22Z
dc.date.issued2016
dc.description.abstractManagerial flexibilities have to be taken into account in ex-ante decision-making on IT investment projects (ITIPs). In many papers of the IS literature, standard financial option pricing models are used to value such managerial flexibilities. Based on a review of the related literature, the paper critically discusses the assumptions of the most frequently used financial option pricing model, namely the Black–Scholes model, arguing for relaxed assumptions that better represent the characteristics of ITIPs. The authors find that existing real option analysis approaches featured in the IS, Finance, and Economics literature are unable to consider more than two of our relaxed assumptions. Consequently, they present their own approach in form of a simulation model for the valuation of real options in ITIPs which offers a better representation of the characteristics of ITIPs by taking the discounted cash-flows and the runtime to be uncertain as well as the market to be incomplete. Based on these modifications of the Black–Scholes model’s assumptions, it is found that the resulting option value contains idiosyncratic risk that has to be taken into account in ITIP decision making. For the realistic case of risk averse decision makers, the consideration of idiosyncratic risk usually leads to a lower risk-adjusted option value, compared to one calculated by means of the Black–Scholes model. This confirms the perception of managers who feel that financial option pricing models frequently overvalue ITIPs and hence may induce flawed investment decisions.
dc.identifier.pissn1867-0202
dc.identifier.urihttps://dl.gi.de/handle/20.500.12116/10701
dc.publisherSpringer
dc.relation.ispartofBusiness & Information Systems Engineering: Vol. 58, No. 6
dc.relation.ispartofseriesBusiness & Information Systems Engineering
dc.subjectAssumptions
dc.subjectBlack–Scholes model
dc.subjectBusiness value of IT investment projects
dc.subjectCharacteristics of IT investment projects
dc.subjectIT investment project decisions
dc.subjectReal option analysis
dc.subjectSimulation model
dc.titleDecision Support for IT Investment Projects
dc.typeText/Journal Article
gi.citation.endPage396
gi.citation.startPage381

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BISE 58(6) - December 2016