Towards a Well-Founded Valuation of Managerial Flexibilities in IT Investment Projects - A Multidisciplinary Literature Review

13 Pages Posted: 10 Mar 2015

See all articles by Bernd Heinrich

Bernd Heinrich

University of Regensburg

Marcel Müller

University of Innsbruck - School of Management

Sebastian Stöckl

University of Liechtenstein

Steffen Zimmermann

University of Innsbruck

Date Written: 2015

Abstract

In the IS literature standard financial option pricing models are predominantly used to value real options embedded in uncertain IT projects. Based on a multidisciplinary literature review, we discuss the assumptions implicit in the prevalent Black-Scholes model and argue for relaxed assumptions that better represent characteristics of uncertain IT projects. This is followed by a discussion of real option approaches from the fields of IS, Finance, and Economics in respect of their compliance with these relaxed assumptions. Findings are: (I) by relaxing the assumptions, the option value and project selection decisions are liable to change; (II) several approaches from Finance and Economics literature better comply with our relaxed assumptions compared to existing approaches in IS literature; (III) no existing real option approach complies with all relaxed assumptions. Adapting and enhancing approaches of other disciplines could be a push towards a well-founded valuation of real options embedded in IT projects.

Keywords: Real Options Analysis, Black-Scholes Model, Assumptions, Characteristics of IT Projects, Multidisciplinary Literature Review

JEL Classification: G11, G13

Suggested Citation

Heinrich, Bernd and Müller, Marcel and Stöckl, Sebastian and Zimmermann, Steffen, Towards a Well-Founded Valuation of Managerial Flexibilities in IT Investment Projects - A Multidisciplinary Literature Review (2015). Available at SSRN: https://ssrn.com/abstract=2575521 or http://dx.doi.org/10.2139/ssrn.2575521

Bernd Heinrich

University of Regensburg ( email )

93040 Regensburg
D-93040 Regensburg, 93053
Germany

Marcel Müller

University of Innsbruck - School of Management ( email )

Austria

Sebastian Stöckl

University of Liechtenstein ( email )

Fürst-Franz-Josef-Strasse
Vaduz, FL-9490
Liechtenstein

HOME PAGE: http://www.uni.li/sebastian.stoeckl

Steffen Zimmermann (Contact Author)

University of Innsbruck ( email )

Universitaetsstr. 15
Innsbruck, A-6020
Austria

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