This paper studies the effects of Artificial Intelligence (AI) innovation on firm-level employment dynamics and corporate valuation. We apply large language models (LLMs) and generative AI to U.S. patent data during 2007-2023 to identify AI-related innovations in seven key functional areas. Using microdata on individual worker skill sets and job transitions between occupations and firms, we find that AI innovations related to engagement, learning, or creativity augment human labor, while those related to perception or motor control displace it. Although both augmenting AI innovations and displacing AI innovations significantly increase firm value, they appear to do so through different channels. In particular, augmenting innovations raise firm-level productivity, whereas displacing innovations improve cost efficiency. We also find that firms obtain more value from their augmenting (displacing) innovations when access to external hires is better (potential cost savings from workforce reduction are larger). Overall, our findings suggest that AI innovation can bring significant value gains to innovating firms, but the extent of those gains depends critically on what frictions are present in external labor markets.