Measuring Creative Destruction

We examine the link between a firm’s future performance and innovations made by other firms using text-based measures of innovation displacement—how relevant one firm’s innovations are to another’s operations. Our findings indicate that when other major innovators’ recent innovations are similar to the focal firm’s technologies, the focal firm’s profit growth over the next 7 years is expected to decline, with the association exacerbating annually, especially for non-innovative firms. This displacement effect persists across various firm types and model specifications. Moreover, firms exposed to higher displacement have higher risk-adjusted stock returns in the following year.