Publication Type

Journal Article

Version

Publisher’s Version

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

Publisher

University of Minnesota

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://www.jstor.org/stable/3250936