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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)

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.

Suggested Citation

  • Kuo-Jung Lee & David S. Shyu & Miao-Ling Dai, 2009. "The Valuation of Information Technology Investments by Real Options Analysis," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 12(04), pages 611-628.
    • Handle: RePEc:wsi:rpbfmp:v:12:y:2009:i:04:n:s0219091509001770
    DOI: 10.1142/S0219091509001770
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
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    Cited by:

    1. Wu-Lung Li & Kenneth Zheng, 2017. "Product market competition and cost stickiness," Review of Quantitative Finance and Accounting, Springer, vol. 49(2), pages 283-313, August.
    2. Shu Feng & Chun-Yu Ho, 2016. "The real option approach to adoption or discontinuation of a management accounting innovation: the case of activity-based costing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 835-856, October.
    3. Christian Ullrich, 2013. "Valuation of IT Investments Using Real Options Theory," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 5(5), pages 331-341, October.
    4. Elisabeta Pana & Sascha Vitzthum & David Willis, 2015. "The impact of internet-based services on credit unions: a propensity score matching approach," Review of Quantitative Finance and Accounting, Springer, vol. 44(2), pages 329-352, February.
    5. Sudipto Sarkar, 2014. "Valuation of tax loss carryforwards," Review of Quantitative Finance and Accounting, Springer, vol. 43(4), pages 803-828, November.
    6. Denise A. Jones, 2018. "Using real options theory to explain patterns in the valuation of research and development expenditures," Review of Quantitative Finance and Accounting, Springer, vol. 51(3), pages 575-593, October.
    7. Chia-Chi Lu & Weifeng Hung & Jyh-Jian Sheu & Pai-Ta Shih, 2011. "Investment with network externality under uncertainty," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 555-564, May.

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    More about this item

    Keywords

    Investment timing; IT investments; real options; JEL Classification: L86; JEL Classification: G31; JEL Classification: G13;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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