Recent empirical studies show that innovative firms heavily rely on debt financing. This paper develops a Schumpeterian growth model in which firms’ dynamic R&D, investment, and financing choices are jointly and endogenously determined. It then investigates the relation between debt financing and innovation and growth. The paper features a rich interaction between firm policies and predicts substantial intra-industry variation in leverage and innovation, consistent with the empirical evidence. It also demonstrates that while debt hampers innovation by incumbents due to debt overhang, it also stimulates entry, thereby fostering innovation and growth at the aggregate level.