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Abstract
Increasing information technology (IT) infrastructure spending and the capability of such projects to provide a platform for a firm to realize value from IT marks their importance. Effective management of IT infrastructure investments includes identification of embedded growth options in the infrastructure, and exercising them in a timely manner. Extant research has recognized that while managers could use real options thinking in IT investment management, managerial bias could affect the timing of option exercise and their realized value. We analyze the effect of time-inconsistent preferences of present-biased managers on the exercise time of real growth options and the realized value using a discrete time option valuation model. The results show that present-biased managers are more likely to exercise options early when the net payoffs are low, the option payoffs have high volatility, and the risk free discount rate is small. In addition, present biased managers are more likely to exercise a growth option early in its life when the project is performing well. We provide implications for practice and IT governance.
Notes
1 These characteristics are more prominent for IT infrastructures that are built and maintained in-house by the organizations than IT infrastructures that are outsourced, like IT-as-a-service for applications management and cloud computing for data management. In-house IT infrastructures provide firms with an opportunity to expand the use of these platforms via investing in new IT assets. In this study, our focus is the in-house IT infrastructures because they provide the firm with growth options.
2 The Max function of payoffs in option value function has minimum value of zero, because the initial investment c is a part of the ‘Project Value’ function consisting of certain benefits b, initial investment c and the real option value.
3 These managers awareness about their self-control (β̂) and their actual self-control (β) is equal to 1. Hence they do not have a bias for present.
4 These managers awareness about their self-control (β̂) mismatches their actual self-control (β) such that β<β̂ =1. Hence they have a bias for present but they believe that they don’t.
5 A growth option in an IT infrastructure investment can be viewed as a call option on a non-dividend paying stock, because benefits from such investments are realized later in the future, over the period of time. This is consistent with the current IS literature (CitationBenaroch, 2002; Citation2006b).
Additional information
Notes on contributors
Sarah S Khan
Sarah S. Khan is a doctoral candidate of MIS at the Belk College of Business at the University of North Carolina-Charlotte. She is an active member of PMI and the Association for Information Systems (AIS). Her research interests include IT investments and project management, real options and e-business standards.
Moutaz Khouja
Moutaz Khouja is a Professor of Operations Management at the UNC-Charlotte. His research interests are in the areas of supply chain management, inventory management, and pricing. His publications have appeared in many journals including Journal of Management Information Systems, Computers and Operations Research, Decision Sciences, Decision Support Systems, and Omega.
Ram L Kumar
Ram L. Kumar is a Professor in Belk College of Business Administration, UNC-Charlotte. He has worked for major multinational corporations such as Fujitsu before entering academics. His current research interests include portfolios of IT investments, Service Science, and Knowledge Management Systems. His research has been published in Communications of the ACM, Computers and Operations Research, Decision Sciences, International Journal of Electronic Commerce, International Journal of Production Research, Journal of MIS, and others.