AbstractIn this paper, I examine how capital structure (relative to target) affects the financing of R&D spending. Studies on capital structure have shown that firms adjust their debt levels toward target debt levels. I show that firms with below‐target debt are more likely to issue debt to finance R&D spending compared to firms that have above‐target debt. The results are stronger for firms that are smaller in size and firms that do not pay dividends. I also show that firms with below‐target debt are more likely to use a greater fraction of proceeds from net debt issuance to finance R&D spending (either directly or indirectly).