A language-based approach to measuring creative exploration

Abstract

• Using textual analysis, we develop a new language-based indicator of firm exploration. • The exploration indicator covers all firms in all industries and spans a wide range of exploratory activities. • The exploration indicator predicts future R&D spending and patent and trademark applications and grants. • Exploration declines after periods of high R&D spending and as the firm matures. • Exploration correlates positively with firm risk. • Exploration exhibits a distinct positive impact on firm value. We propose a new measure of the exploratory activities of companies based on the idea that experimentation with new courses of action and the need to describe them entails the adoption of new words in firm regulatory disclosures. Unlike traditional indicators, such as R&D spending, the proposed exploration indicator is available for all publicly traded firms across all industries. The exploration indicator predicts firm knowledge accumulation, as measured by future patenting and trademarking activities. It further shows that firm exploration declines after periods of high R&D spending and over time. The exploration indicator correlates positively with firm risk and exhibits a distinct positive impact on firm value unexplained by traditional innovation indicators. Our language-based approach can be applied to measure creative contributions in other domains, such as government grant applications and academic publications.