Rational Escalation: The Real Option Perspective

Escalation is generally defined in investment context as continuation of an investment project after receiving negative signals about the outcome. This study demonstrates that under conditions of uncertainty about project outcome there is a rational incentive for the manager to continue a project to receive more information. Taking this real option on continuing the project has value for the firm. Simulations results from the option value model of investment demonstrate that likelihood of escalation is higher when signals have higher quality which increases the value of getting an additional signal. Likelihood of escalation also increases when the prior expectation of success is low, and when project termination cost is low. Continuing the project to receive additional information is shown to be more profitable than the simple net present value rule that excludes option value. The model implies that escalation may be value-maximizing for the firm, and managers should not automatically be discouraged to continue a project when new signals about its success may appear in the future

Escalation Of Commitment In MIS Projects: A Meta-Analysis

Escalation of commitment emerged as a major explanation for the propensity of management information systems projects to exceed time and budget constraints. Earlier studies demonstrated that escalation in MIS is a common event.  This study presents a meta-analysis of the various theories of escalation that allows for integration of the various escalation factors into a model of irrational escalation and a model of rational escalation. The implications of rational and irrational escalation for the decision making in management of information systems are discussed

ON THE ROLE OF SWITCHING COSTS AND DECISION REVERSIBILITY IN INFORMATION TECHNOLOGY ADOPTION AND INVESTMENT

<div><p>ABSTRACT Managerial decisions on the adoption of innovative technologies by a firm are made under conditions of uncertainty and must account for network externalities that imply the benefit of a technology is received not only from its intrinsic payoff, but also from the size of the network of other adopters. The theoretical model presented in this study demonstrates that for firms evaluating information technology investment with network effects key determinants of the technology selection pattern are adoption reversibility and switching costs. If switching costs are sufficiently high to make technology adoption irreversible then safer established technologies have an advantage as choosing a riskier untested technology opens the firm to the risk of being stranded without a network of followers. With lower switching costs, the technology adoption decision is reversible which provides an advantage to riskier untested technologies. A discussion of empirical evidence on adoption patterns in information technology provides application for the theoretical model.</p></div

Escalation of commitment and CEO departures: theory and evidence

The escalation of commitment process involves a decision-maker continuing commitment to an investment after receiving negative information. This study develops a principal-agent model to explore how escalation decisions are linked with departures of CEOs from the position.&nbsp; With asymmetric information, a CEO has an incentive to conceal prior decision errors by escalating commitment to failing investments and leaving the firm before the outcome of investment decisions is disclosed publicly. Results of empirical analysis based on a sample of over 3,000 US firms are consistent with the theory and demonstrate that firms’ reporting of low financial performance relative to their industry as well as initiation of new discontinued operations are preceded, and not followed, by unplanned CEO departures

Financial Impact of Moving to Cloud Computing

This study explores the impact of cloud service adoption on the financial performance of the adopting firms. While the popularity of cloud computing continues to grow, disagreements abound regarding the costs and benefits of its adoption. Cloud service providers claim that the primary benefits are reduced cost and increased profitability due to improved operational efficiency. Paradoxically, accounting and finance professionals warn about potential negative impact on key financial reporting metrics including increased operating expenses and decreased earnings due to the added subscription fees. We analyze a sample of reported early cloud service adopters and compare their financial reporting metrics of interest to those from a control group of firms from the same industries over the period from 2005 to 2015 covering the first wave of large-scale adoption. We find that early adopters exhibit lower depreciation expenses and lower operating expenses than the average firm. Early adopters also exhibit higher market-to-book ratios, implying that investors expect comparably higher earnings growth, potentially due to the expected efficiencies achieved by using cloud computing

Top management team turnover, CEO succession type, and strategic change

While previous research suggests that CEO turnover correlates with strategic changes in firm's operations such as discontinuation of operations, we demonstrate that such findings apply only to specific types of CEO turnover, and only if non-CEO members of the top management team also exit the firm. Our analysis examines cases of contender, follower, and outsider succession and reinforces the key role of non-CEO departures in strategic change at a firm. The results support an integration of the upper echelons perspective and the power circulation theory view of top management team turnover.Executive turnover Top management teams Strategic change Discontinued operations Power circulation theory