Dysfunctional neural control of airway smooth muscle (ASM) is involved in inflammatory diseases, such as asthma. However, neurogenesis in the lung is poorly understood. This study uses mouse models to investigate developmental mechanisms of ASM innervation, a process that is highly coordinated with ASM formation during lung branching morphogenesis. We show that brain-derived neurotrophic factor (BDNF) is an essential ASM-derived signal for innervation. Although BDNF mRNA expression is temporally dissociated with ASM formation and innervation, BDNF protein is coordinately produced through post-transcriptional suppression by miR-206. Using a combination of chemical and genetic approaches to modulate sonic hedgehog (Shh) signaling, a pathway essential for lung branching and ASM formation, we show that Shh signaling blocks miR-206 expression, which in turn increases BDNF protein expression. Together, our work uncovers a functional cascade that involves Shh, miR-206 and BDNF to coordinate ASM formation and innervation.