Evolutionary innovations and ecological competition are factors often cited as drivers of adaptive phenotypic diversification. Yet many innovations result in stabilizing rather than diversifying selection on morphology, and morphological disparity among co-existing species can reflect competitive exclusion (species sorting) rather than sympatric adaptive divergence (character displacement). We studied the innovation of gliding in dragons (Agamidae) and squirrels (Sciuridae) and its effect on subsequent body size diversification. We found gliding either had no impact (squirrels) or resulted in strong stabilizing selection on body size (dragons). Despite this constraining force on dragons, sympatric gliders exhibited greater disparity in size compared to allopatric gliders. This seems unlikely to have occurred via species sorting and is more consistent with ecological competition changing the adaptive landscape of body size evolution to induce character displacement. These results show that innovations do not necessarily instigate further differentiation among species as so often assumed, and suggest competition has the potential to be a powerful force generating morphological divergence among co-existing species, even in the face of strong stabilizing selection.