Software Growth Options

Towards a Well-Founded Valuation of Managerial Flexibilities in IT Investment Projects - A Multidisciplinary Literature Review

“…Several authors suggest ROA for the valuation of ITIPs (e.g., Benaroch et al 2010;Benaroch et al 2006;Heinrich et al 2011;Taudes 1998). Specifically the BSM is widely used (e.g., Benaroch and Kauffman 1999;Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998) to value real options embedded in ITIPs.…”

“…Specifically the BSM is widely used (e.g., Benaroch and Kauffman 1999;Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998) to value real options embedded in ITIPs. Subsequently, we explicate how the BSM assumptions relate to ITIPs and suggest relaxed assumptions that better represent the characteristics of ITIPs.…”

“…2 We included the latter two disciplines to our review as both offer focused methodological discussions on extensions in their ROA approaches and do not only apply existing models. 3 The analyses are based on the BSM assumptions as it is most commonly used in the IS literature (e.g., Benaroch and Kauffman 1999;Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998;Taudes et al 2000). The Binomial model as well as the Margrabe model are generally based on the same assumptions: The Binomial Model is the discrete counterpart of the BSM (cf., Cox et al, 1979) and the Margrabe model relaxes one assumption and allows for uncertain discounted cash outflows following a Geometric Brownian Motion (cf., Margrabe 1978).…”

“…In several articles of the IS field, dcif of ITIPs are modelled to follow GBM (e.g., Benaroch et al 2006;Heinrich et al 2011;Su et al 2009;Taudes 1998). The probability distribution of GBM at any one point in time is lognormal with linearly increasing mean and variance in time (cf., Hull 2009, p. 278).…”

“…To value such real options most approaches featuring in the Information Systems (IS) literature use standard financial option pricing models such as the Black-Scholes model (BSM; e.g., Benaroch et al 2006;Heinrich et al 2011;Taudes 1998), the Binomial model (e.g., Kambil et al 1991;Khan et al 2013), or the Margrabe model (e.g., Bardhan et al 2004;Dos Santos 1991). However, these approaches are currently rarely applied by companies since managers are not satisfied with the results given that investment projects are far more complex than financial options.…”