Using a German firm-level data set, this paper is the first to jointly study the cyclical
properties of the cross-sections of firm-level real value added and Solow residual innovations,
as well as capital and employment adjustment. We find two new business cycle
facts: 1) The cross-sectional standard deviation of firm-level innovations in the Solow
residual, value added and employment is robustly and significantly countercyclical. 2) The
cross-sectional standard deviation of firm-level investment is procyclical. We show that a
heterogeneous-firm RBC model with quantitatively realistic countercyclically disperse innovations
in the firm-level Solow residual and non-convex adjustment costs calibrated to
the non-Gaussian features of the steady state investment rate distribution, produces investment
dispersion that positively comoves with the cycle, with a correlation coefficient
of 0.58, compared to 0.45 in the data. We argue more generally that the cross-sectional
business cycle dynamics impose tight empirical restrictions on structural parameters and
stochastic properties of driving forces in heterogeneous-firm models, and are therefore
paramount in the calibration of these models.