Recent genetic studies of human hair disorders have suggested a critical role of lysophosphatidic acid (LPA) signalling in hair follicle development, mediated by an LPA‐producing enzyme, phosphatidic acid‐selective phospholipase A₁α (PA‐PLA₁α, also known as LIPH), and a recently identified LPA receptor, P2Y5 (also known as LPA₆). However, the underlying molecular mechanism is unknown. Here, we show that epidermal growth factor receptor (EGFR) signalling underlies LPA‐induced hair follicle development. PA‐PLA₁α‐deficient mice generated in this study exhibited wavy hairs due to the aberrant formation of the inner root sheath (IRS) in hair follicles, which resembled mutant mice defective in tumour necrosis factor α converting enzyme (TACE), transforming growth factor α (TGFα) and EGFR. PA‐PLA₁α was co‐localized with TACE, TGFα and tyrosine‐phosphorylated EGFR in the IRS. In PA‐PLA₁α‐deficient hair follicles, cleaved TGFα and tyrosine‐phosphorylated EGFR, as well as LPA, were significantly reduced. LPA, P2Y5 agonists and recombinant PA‐PLA₁α enzyme induced P2Y5‐ and TACE‐mediated ectodomain shedding of TGFα through G12/13 pathway and consequent EGFR transactivation in vitro. These data demonstrate that a PA‐PLA₁α–LPA–P2Y5 axis regulates differentiation and maturation of hair follicles via a TACE–TGFα–EGFR pathway, thus underscoring the physiological importance of LPA‐induced EGFR transactivation.