Real Options Analysis in Strategic Information Technology Adoption

2005 ◽  
pp. 2397-2402
Author(s):  
Xiaotong Li
Keyword(s):  
Information Technology ◽  
Technology Adoption ◽  
Real Options ◽  
Investment Planning ◽  
It Investment ◽  
Real Options Theory ◽  
The Real ◽  
Resource Managers ◽  
New Perspective ◽  
Options Theory

Many information resource managers have learned to be proactive in today’s highly competitive business environment. However, limited financial resources and many uncertainties require them to maximize their shareholders’ equity while controlling the risks incurred at an acceptable level. As the unprecedented development in information technology continuously produces great opportunities that are usually associated with significant uncertainties, technology adoption and planning become more and more crucial to companies in the information era. In this study, we attempt to evaluate IT investment opportunities from a new perspective, namely, the real options theory. Its advantage over other capital budgeting methods like static discounted cash flow analysis has been widely recognized in analyzing the strategic investment decision under uncertainties (Amram & Kulatilaka, 1999; Luehrman, 1998a, 1998b). Smith and McCardle (1998, 1999) further show that option pricing approach can be integrated into standard decision analysis framework to get the best of the both worlds. In fact, some previous IS researches have recognized the fact that many IT investment projects in the uncertain world possess some option-like characteristics (Clemsons, 1991; Dos Santos, 1991; Kumar, 1996). Recently, Benaroth and Kauffman (1999) and Taudes, Feurstein and Mild (2000) have applied the real options theory to real-world business cases and evaluated this approach’s merits as a tool for IT investment planning.

Real Options Analysis in Strategic Information Technology Adoption

2011 ◽  
pp. 3199-3204
Author(s):  
Xiaotong Li
Keyword(s):  
Information Technology ◽  
Technology Adoption ◽  
Real Options ◽  
Real World ◽  
Investment Decision ◽  
Investment Planning ◽  
It Investment ◽  
Real Options Theory ◽  
The Real ◽  
Options Theory

Many information resource managers have learned to be proactive in today’s highly competitive business environment. However, limited financial resources and many uncertainties require them to maximize their shareholders’ equity while controlling the risks incurred at an acceptable level. As the unprecedented development in information technology continuously produces great opportunities that are usually associated with significant uncertainties, technology adoption and planning become more and more crucial to companies in the information era. In this study, we attempt to evaluate IT investment opportunities from a new perspective, namely, the real options theory. Its advantage over other capital budgeting methods like static discounted cash flow analysis has been widely recognized in analyzing the strategic investment decision under uncertainties (Amram & Kulatilaka, 1999; Luehrman, 1998a, 1998b). Smith and McCardle (1998, 1999) further show that option pricing approach can be integrated into standard decision analysis framework to get the best of the both worlds. In fact, some previous IS researches have recognized the fact that many IT investment projects in the uncertain world possess some option-like characteristics (Clemsons, 1991; Dos Santos, 1991; Kumar, 1996). Recently, Benaroth and Kauffman (1999) and Taudes, Feurstein and Mild (2000) have applied the real options theory to real-world business cases and evaluated this approach’s merits as a tool for IT investment planning. As all real options models inevitably depend on some specific assumptions, their appropriateness should be scrutinized under different scenarios. This study aims to provide a framework that will help IS researchers to better understand the real options models and to apply them more rigorously in IT investment evaluation. As the technology changes, the basic economic principles underlying the real options theory do not change. We do need to integrate the IT dimension into the real options based investment decision-making process. Using electronic brokerage’s investment decision in wireless technology as a real-world example, we show the importance of adopting appropriate real options models in IT investment planning. By specifically focusing on the uncertainties caused by IT innovation and competition, our study also gives some intriguing results about the dynamics between IT adoption and the technology standard setting process.

Internal Control Weakness and the Asymmetrical Behavior of Selling, General, and Administrative Costs

2019 ◽  
pp. 0148558X1986811
Author(s):  
Jeong-Bon Kim ◽  
Jay Junghun Lee ◽  
Jong Chool Park
Keyword(s):  
Real Options ◽  
Internal Control ◽  
Information Quality ◽  
Information Control ◽  
Information Uncertainty ◽  
Omitted Variables ◽  
Real Options Theory ◽  
The Real ◽  
Cost Stickiness ◽  
Options Theory

Firms with internal control weakness (ICW) problems are less likely to provide managers with timely and precise information useful for internal resource management. The real options theory implies that managers in ICW firms, faced with information uncertainty, are more likely to postpone downward adjustments of slack resources by exercising an option to wait until more information about future business prospects becomes available. Based upon this theory, we hypothesize and find that selling, general, and administrative (SG&A) costs are stickier for ICW firms than for non-ICW firms. We also find that the effect of ICW on SG&A cost stickiness is primarily attributable to internal information control problems, and becomes weakened significantly after firms remediate previously reported ICW. This impact of ICW on SG&A cost stickiness is robust to controlling for the possible influence of omitted variables, accounting for potential endogeneity in the presence of ICW, and using a firm-specific measure of cost stickiness. Our results are consistent with the prediction of the real options theory in that poor information quality associated with ICW incents managers to postpone downward adjustments of SG&A resources until the information uncertainty is resolved.

scholarly journals ECONOMIC VALUE OF R&D IN THE FIELD OF FAST REACTORS TAKING INTO ACCOUNT UNCERTAINTY ON THEIR COMPETITIVENESS: THE CASE OF FRANCE

2017 ◽  
Vol 22 (1) ◽  
Author(s):  
NATHALIE TAVERDET-POPIOLEK ◽  
BIANKA SHOI
Keyword(s):  
Real Options ◽  
Economic Value ◽  
Fast Reactors ◽  
Real Options Theory ◽  
The Real ◽  
Previous Generation ◽  
Nuclear Development ◽  
Key Variables ◽  
Options Theory

In a context of mix signals regarding worldwide nuclear development, this paper aims at assessing the economic value of pursuing research in Generation IV fast reactors today, given that it would allow industrial deployment around 2040 in case of high uranium prices. Two key variables shall be considered as inputs for the assessment: the price of uranium and the overcost of Generation IV reactors compared with the previous generation. Our model is based on the “real options” theory which demonstrates that this value is positive and outweighs the risks associated with the competitiveness of Generation IV. It is quite simple but it clarifies and introduces important aspects of the field.

The Value of Managerial Flexibility in Strategic IT Investment

2011 ◽  
pp. 111-132 ◽  
Author(s):  
Xiaotong Li ◽  
John D. Johnson
Keyword(s):  
Real Options ◽  
Investment Decision ◽  
Investment Decisions ◽  
It Investment ◽  
Real Options Theory ◽  
Investment Evaluation ◽  
Managerial Flexibility ◽  
Investment Opportunities ◽  
The Relationship ◽  
Options Theory

In this chapter, we discuss the real options theory and its applications in IT investment evaluation. We provide a framework within which the appropriateness of using real options theory in strategic IT investment evaluation is systematically justified. In our framework, IT investment opportunities are classified into four categories based on two criteria: the technology switching costs and the nature of competition. We point out that different real options models should be adopted for each category. The electronic brokerage’s investment decision in wireless technology is discussed as a real-world case within the framework. Our study also provides some insights about the relationship between technology standardization and IT investment decisions.

scholarly journals Application of the “real options theory” method to the production systems used in dairy cattle farming

2020 ◽  
Vol 72 (6) ◽  
pp. 2288-2296
Author(s):  
D.T. Xavier ◽  
A.A.C. Peres ◽  
G.L. Almeida ◽  
C.A.B. Carvalho
Keyword(s):  
Real Options ◽  
Evaluation Method ◽  
Net Present Value ◽  
Production Systems ◽  
Significant Feature ◽  
Real Options Theory ◽  
The Real ◽  
Guinea Grass ◽  
Sorghum Silage ◽  
Options Theory

ABSTRACT The objective of this study was to analyze applications of real options theory for increasing the productivity of Mantiqueira ecotype dairy cows kept in guinea grass pastures with different sources of bulky supplementation (black oats, fodder cane, or sorghum silage), because the traditional methodologies do not consider the uncertainties related to this activity. Real options theory, an investment evaluation method, fills this gap as its most significant feature is its flexibility to act on uncertain events. Based on the results obtained for two economic indicators, the net present value and internal rate of return, and considering the production items identified in the sensitivity analysis, this study evaluated the expansion flexibility of each system using the real options theory methodology in discrete time as proposed by Copeland and Antikarov (2001). The analysis of the expansion options showed that the values of the production systems increased by 6.73%, 1.21%, and 19.49% for the systems supplemented with sorghum silage, black oats, and fodder cane, respectively. The expanded net present values were R$ 141,642.39, R$ 64,211.08, and R$ 58,013.07 for the systems that adopted bulky supplementation with black oats, fodder cane, and sorghum silage, respectively.

scholarly journals EXPLORING MODES OF ENTRY INTO INTERNATIONAL MARKETS: DIRECT INVESTMENT OR CONTRACTUAL RELATIONS

2014 ◽  
Vol 15 (1) ◽  
pp. 56-73
Author(s):  
Rui Fernandes ◽  
Borges Gouveia ◽  
Carlos Pinho
Keyword(s):  
Real Options ◽  
Direct Investment ◽  
Demand Uncertainty ◽  
Foreign Market ◽  
International Markets ◽  
New Markets ◽  
Real Options Theory ◽  
The Real ◽  
Mode Of Entry ◽  
Options Theory

We consider the multinational company's decision on whether to enter a new foreign market using direct investment by establishing a subsidiary, direct exporting or contracting a local distributor, with the option to invest later. We develop two models, based on the real options theory, to support such decisions. The option on direct exporting or on a local distributor allows the firm to minimize risks by finding out if the market is large enough to support future direct investment. We find the direct investment to be the desirable mode of entry in large markets subject to low demand uncertainty. Overall, the investigation increases the knowledge related with exploring new markets subject to demand uncertainty, valuing the flexibility of present and future options.

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