Justifying Electronic Banking Network Expansion Using Real Options Analysis (2000)
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BibTeX
@MISC{Benaroch00justifyingelectronic,
author = {Michel Benaroch and Robert J. Kauffman},
title = {Justifying Electronic Banking Network Expansion Using Real Options Analysis},
year = {2000}
}
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Abstract
The application of real options analysis to information technology investment evaluation problems recently has been proposed in the IS literature by Dos Santos (1991), Kambil et al. (1993), Kumar (1996), Chalasani et al. (1997), and Taudes (1998). The research reported on in this paper illustrates the value of applying real options analysis in the context of a case study involving the deployment of point-of-sale (POS) debit services by the Yankee 24 shared electronic banking network of New England. In the course of so doing, the paper also attempts to operationalize real options analysis concepts by examining claimed strengths of this analysis approach and balancing them against methodological difficulties that this approach is believed to involve. The research employs a version of the Black-Scholes option-pricing model that is adjusted for risk-averse investors, showing how it is possible to obtain reliable values for Yankee 24's "investment timing option", even in the absence of a market to price it. To gather evidence for the existence of the timing option, basic scenario assumptions and the parameters of the adjusted Black-Scholes model, a structured interview format was developed. The results obtained using real options analysis enabled the network's senior management to identify conditions for which entry into the POS debit market would be profitable. These results also indicated that, in the absence of formal evaluation of the timing option, traditional approaches for evaluating information technology investments would have produced the wrong recommendations.
Keyphrases
real option analysis timing option basic scenario assumption black-scholes option-pricing model analysis approach information technology investment methodological difficulty wrong recommendation information technology investment evaluation problem reliable value black-scholes model do santos po debit market case study senior management investment timing option debit service formal evaluation risk-averse investor structured interview format electronic banking network real option analysis concept claimed strength new england traditional approach
