Research Note ---Using Real Options to Investigate the Market Value of Virtual World Businesses

Sung-Byung Yang (), Jee-Hae Lim (), Wonseok Oh (), Animesh Animesh () and Alain Pinsonneault ()
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Sung-Byung Yang: School of Business Administration, Hansung University, Seongbuk-gu, Seoul 136-792 Korea
Jee-Hae Lim: School of Accounting and Finance, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada
Wonseok Oh: School of Business, Yonsei University, Seodaemun-gu, Seoul, Korea 120-749
Animesh Animesh: Desautels Faculty of Management, McGill University, Montréal, Québec H3A 1G5, Canada
Alain Pinsonneault: Desautels Faculty of Management, McGill University, Montréal, Québec H3A 1G5, Canada

Information Systems Research, 2012, vol. 23, issue 3-part-2, 1011-1029

Abstract: Virtual worlds are relatively nascent IT platforms with the potential to radically transform business processes and generate significant payoffs. However, in striving to achieve specific outcomes, firms may incur significant risks. Although many companies claim to have attained substantial benefits from their virtual world initiatives, many others have recently scaled down or even abandoned their experimental virtual world projects. This paper assesses the value proposition of virtual world initiatives from the real options perspective. Specifically, we argue that virtual worlds act as a firm's growth option, and we adopt the lens of real options to evaluate the value of this emerging and uncertain technological platform. We employ the event study method to assess the stock market's perception of the future revenue streams of 261 virtual world initiatives announced between 2006 and 2008. Our results indicate that, overall, the market reacts positively to virtual world initiatives. Our findings also show that investors' reactions to virtual world initiatives are contingent on four key characteristics of virtual world initiatives: interpretive flexibility (i.e., technologies that allow managers to experiment), divisibility (i.e., ability to incrementally implement the technology), strategic importance (i.e., an initiative that affects a process of strategic importance to the firm), and exploitable absorptive capacity (i.e., ability to exploit the knowledge acquired through the initiative). We discuss the key implications for real-world practitioners and suggest directions for future research.

Keywords: virtual world investments; value creation; real options; strategic importance; divisibility; exploitative absorptive capacity; event study (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (7)

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