Some firms give up debt financing and choose the extreme financial conservative strategy-zero leverage in reality, although the traditional theories of capital structure argue that there is benefit to maximize the shareholder value if the firm has moderate debts. This phenomenon is referred to as the mystery of zero leverage and it has raised the attention of the researchers. Using China A share listed firms during the years from 1993 to 2012 as the research objects, the debt-free firms are matched with leverage firms according to the rules of year, industry and size firstly. Second, debt-free and leverage firm portfolio are built respectively. The difference of the financial and market performance between debt-free and leverage firms is further analyzed. It compares to the debt-free and leverage firmportfolios' market performance and buy-and-hold abnormal returns, tests the financial performance of debt-free firms and their matched firms. Specially, according to the characteristic of controlling of sample companies, the debt-free and leverage firm performance difference because of firms controlling is tested. The results indicate that debt-free firm financial performances, both state and non-state controlling firm', are better than the leverage firm'. Comparing to the debt firm, the state controlling debt free firms have better market performance, although there is no significant difference between debt-free and leverage firm portfolios market performance. As well, state-controlled debt-free firm has still significantly positive excess returns after controlling risk factors such as market, book-market ratio and size. In all, the research evidence of debt-free firms is expanded on one hand. At the same time, its conclusions have a guiding significance and reference value for investors to identify the effect factors on the firm's performance, and help them to make investment decision.
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