Smad4 is a unique nuclear transducer for all TGF-beta signaling pathways and regulates gene transcription during development and tissue homeostasis. To elucidate the postnatal role of TGF-beta signaling in the mammalian brain, we generated forebrain-specific Smad4 knock-out mice. Surprisingly, the mutants showed no alteration in long-term potentiation and water maze, suggesting that Smad4 is not required for spatial learning and memory. However, these mutant mice did show enhancement of paired-pulse facilitation in excitatory synaptic transmission and stronger paired-pulse depression of GABA(A) currents in the hippocampus. The alteration of hippocampal electrophysiology correlated with mouse hyperactivity in homecage and open field tests. Mutant mice also showed overgrooming as well as deficits of prepulse inhibition, a widely used endophenotype of schizophrenia. With a specific real-time PCR array focused on TGF-beta signaling pathway, we identified a novel regulation mechanism of the pathway in the hippocampal neurons, in which Smad4-mediated signaling suppresses the level of extracellular antagonism of TGF-beta ligands through transcriptional regulation of follistatin, a selective inhibitor to activin/TGF-beta signaling in the hippocampus. In summary, we suggest that the canonical TGF-beta signaling pathway is critical for use-dependent modulation of GABA(A) synaptic transmission and dendritic homeostasis; furthermore, a disruption in the balance of the excitatory and inhibitory hippocampal network can result in psychiatric-like behavior.