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The Valuation of Information Technology Investments by Real Options Analysis

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  • Kuo-Jung Lee

    ()
    (Department of Commerce Automation and Management, National Pingtung Institute of Commerce, 51, Minsheng E. Rd., Pingtung City 900, Taiwan)

  • David S. Shyu

    ()
    (Department of Finance, National Sun Yat-Sen University, Kaohsiung 804, Taiwan)

  • Miao-Ling Dai

    ()
    (Department of General Education, National Sun Yat-Sen University, Kaohsiung 804, Taiwan)

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    Abstract

    This study establishes a dynamic model under real options analysis to analyze the optimal timing decision of information technology (IT) investments when the output price for firms is stochastic and benefits of IT investments are arisen from the increasing output price, increasing sale, and cost savings. We derive the closed form expression of the timing of IT investments and furthermore prove that IT investments rise at an increasing rate in economic booms and fall in economic busts. This study finds that increasing (decreasing) price volatility will delay (advance) the timing of IT investments. Increasing IT investments, however, may not delay the timing of IT investments. In addition, the decreasing (increasing) efficiency and increasing (decreasing) depreciation of IT investments will delay (advance) the timing of IT investments.

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    Bibliographic Info

    Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Review of Pacific Basin Financial Markets and Policies.

    Volume (Year): 12 (2009)
    Issue (Month): 04 ()
    Pages: 611-628

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    Handle: RePEc:wsi:rpbfmp:v:12:y:2009:i:04:p:611-628

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    Related research

    Keywords: Investment timing; IT investments; real options; JEL Classification: L86; JEL Classification: G31; JEL Classification: G13;

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    Cited by:
    1. Christian Ullrich, 2013. "Valuation of IT Investments Using Real Options Theory," Business & Information Systems Engineering, Springer, vol. 5(5), pages 331-341, October.

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