Too Tech to Fail?

Abstract

Do the biggest tech companies have a bond funding edge? Are they the new ”Too-Big-to-Fail” (TBTF)? TBTF represents, among other things, the idea that the biggest firms (usually banks) receive an unfair funding advantage over smaller ones in the bond market. By investigating the tech financial world, our empirical work reveals two important findings. First, within the universe of bond-issuing U.S. firms, the largest tech companies did experience a funding advantage – of about 30bps. on average – from 2014 to 2021. Our estimates suggest that the (implicit) subsidy is in the range of 1 to 2 USD billion per year and that this has been steadily rising over the last years, especially during the Covid-19 period. Second, using a unique dataset of security-level portfolio holdings by sector in each euro area country, we investigate portfolio choices during times of financial distress. We find evidence of a sharp relative increase in portfolio holdings of BigTech securities during times of market turbulence suggesting that BigTech bonds act as safe assets. Overall, while the magnitudes of our estimates remain small from a macroeconomic perspective, we find that BigTech companies are slowly converging towards what we call the ”Too-Tech-to-Fail” (TTTF) paradigm. In other words, the unique position they have in the new economy, seems to artificially boost their credit profiles and lower their bond funding costs, potentially creating an uneven playing field.

Keywords: Too Big to Fail, Too Tech to Fail, BigTech, Systemic Risk, Moral Hazard

JEL Classification: G21, G24, G28