Recessions are associated with sharp increases in turbulence that reshuffle firms’productivity rankings. To study the business cycle implications of turbulence shocks, we use Compustat data to construct a measure of turbulence based on the (inverse of) Spearman correlations of firms' productivity rankings between adjacent years. We document evidence that turbulence rises in recessions, reallocating labor and capital from high- to low-productivity firms and reducing aggregate TFP and the stock market value of firms. A real business cycle model with heterogeneous ffrms and ffnancial frictions can generate the observed macroeconomic and reallocation effects of turbulence. In the model, increased turbulence makes high-productivity ffrms less likely to remain productive, reducing their expected equity values and tightening their borrowing constraints relative to low-productivity firms. This leads to a reallocation that reduces aggregate TFP. Unlike uncertainty, turbulence changes both the conditional mean and the conditional variance of the firm productivity distribution, enabling a turbulence shock to generate a recession with synchronized declines in aggregate activities.

Debt covenants are pervasive in debt contracts. To prevent the dilution of existing debt, most creditors set covenants of a maximum debt-to-earnings ratio for borrowing firms. In this paper, we embed debt covenants into a workhorse real business cycle model with defaultable debt to study its macroeconomic implications. In our model, creditors penalize firms when debt covenants are violated. We show such a mechanism that covenants significantly reduce debt dilution and default over the business cycles. Furthermore, reduced debt dilution due to debt covenants also mitigates the debt overhang problem and thus boosts capital accumulation. Compared to counterfactual economies without covenants, the baseline economy with debt covenants experiences endogenous stabilization of macroeconomic shocks and higher levels of capital, output, and consumption.

We provide empirical evidence and a theoretical explanation for the asymmetries of capital growth rate at the firm level and in the aggregate. Capital growth rate at the firm level is positively skewed, while the average capital growth rate across firms, as well as its slope, is negatively skewed. We develop a model of irreversible corporate investment that can reconcile these opposite patterns. The key to our model is that firms do not observe the true state of economy and have to infer it from noisy signals. The time-varying uncertainty in the learning process leads to variations in the option value of waiting, which causes many firms to react to bad signals arriving in good times, and few firms to react to good signals arriving in bad times. As a result, the capital growth rate at the aggregate level exhibits a negative skewness both in levels and in the slope, even though irreversibility causes positive skewness at the individual firm level.