Justifying Electronic Banking Network Expansion Using Real Option Pricing: An Empirical Illustration
Publication Type
Journal Article
Version
publishedVersion
Publication Date
6-2000
Abstract
The application of real options analysis to information technology investment evaluation problems recently has been proposed in the IS literature (Chalasani et al. 1997; Dos Santos 1991; Kambil et al. 1993; Kumar 1996; Taudes 1998). The research reported on in this paper illustrates the value of applying real options analysis in the context of a case study involving the deployment of point-of-sale (POS) debit services by the Yankee 24 shared electronic banking network of New England. In the course of so doing, the paper also attempts to operationalize real options analysis concepts by examining claimed strengths of this analysis approach and balancing them against methodological difficulties that this approach is believed to involve. The research employs a version of the Black-Scholes option pricing model that is adjusted for risk-averse investors, showing how it is possible to obtain reliable values for Yankee 24’s “investment timing option,” even in the absence of a market to price it. To gather evidence for the existence of the timing option, basic scenario assumptions, and the parameters of the adjusted Black-Scholes model, a structured interview format was developed. The results obtained using real options analysis enabled the network’s senior management to identify conditions for which entry into the POS debit market would be profitable. These results also indicated that, in the absence of formal evaluation of the timing option, traditional approaches for evaluating information technology investments would have produced the wrong recommendations.
Keywords
Black-Scholes model, investment decision making under uncertainty, electronic banking networks, POS debit systems, project investments, IT investment evaluation, option pricing models, real options
Discipline
Computer Sciences | Finance and Financial Management | Management Information Systems
Research Areas
Information Systems and Management
Publication
MIS Quarterly
Volume
24
Issue
2
First Page
197
Last Page
225
ISSN
0276-7783
Identifier
10.2307/3250936
Publisher
University of Minnesota
Citation
Benaroch, Michel and KAUFFMAN, Robert J..
Justifying Electronic Banking Network Expansion Using Real Option Pricing: An Empirical Illustration. (2000). MIS Quarterly. 24, (2), 197-225.
Available at: https://ink.library.smu.edu.sg/sis_research/2149
Copyright Owner and License
Publisher
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.2307/3250936
Included in
Computer Sciences Commons, Finance and Financial Management Commons, Management Information Systems Commons