We present a numerical simulation study on the effect of the linewidth enhancement factor (α) of semiconductor laser and dispersion management methods of optical fibers on the performance of 40-Gb/s directly-modulated fiber links and their application in WDM systems. The dispersion management methods include the use of non-zero dispersion-shifted fiber (NZ-DSF), dispersion-compensating fiber (DCF), and fiber Bragg grating (FBG). The optimal values of the α-parameter and the best dispersion management method are applied to design and simulate a four-channel × 40-Gb/s WDM fiber system. The obtained results show that the increase in the α-parameter and/or fiber length reduces the performance of both the 40-Gb/s optical link and the WDM system. Regarding the 40-Gb/s optical link, when α = 1, using –NZ-DSF or + NZ-DSF, DCF with SSMF, and FBG with SSMF work to increase the transmission length from 1.6 km of a standard single-mode fiber (SSMF) to 7.2, 26.5, and 40 km, respectively. Whereas at α = 3.5, the maximum transmission length reaches 1.2 km when using SSMF, –NZ-DSF, or + NZ-DSF, while it increases to 13 and 35 km when using DCF with SSMF, and FBG with SSMF, respectively. In the designed WDM system, the use of FBG with SSMF is predicted as the most effective method for dispersion management. The maximum transmission length reaches 25 km when α = 1, but reduces to 12 km when α = 3.5.