Valuation of IT Investments Using Real Options Theory

Christian Ullrich ()

Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, 2013, vol. 5, issue 5, 341 pages

Abstract: Real Options Theory is often applied to the valuation of IT investments. The application of Real Options Theory is generally accompanied by a monetary valuation of real options through option pricing models which in turn are based on restrictive assumptions and thus subject to criticism. Therefore, this paper analyzes the application of option pricing models to the valuation of IT investments. A structured literature review reveals the types of IT investments which are valued with Real Options Theory in scientific literature. These types of IT investments are further investigated and their main characteristics are compared to the restrictive assumptions of traditional option pricing models. This analysis serves as a basis for further discussion on how the identified papers address these assumptions. The results show that a lot of papers do not account for critical assumptions, although it is known that the assumptions are not fulfilled. Moreover, the type of IT investment determines the criticality of the assumptions. Additionally, several extensions or adaptions of traditional option pricing models can be found which provide the possibility to relax critical assumptions. Researchers can profit from the results derived in this paper in two ways: First, it is demonstrated which assumptions can be critical for various types of IT investments. Second, extensions of option pricing models that relax critical assumptions are introduced. Copyright Springer Fachmedien Wiesbaden 2013

Keywords: Real options; Black-Scholes model; Binomial model; Investment valuation; Information technology; Project valuation (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (13)

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DOI: 10.1007/s12599-013-0286-0

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