Abstract: Zero-leverage firms also prevail in the Chinese market, and the percentage of zero-leverage firms exhibit an increasing trend. This paper finds that the restart of IPO activities, the development of multi-level capital market as well as industry effects contribute to explaining the increasing prevalence. In terms of firms’ financial characteristic, firms with lower total assets, younger age, higher non-debt tax shields, higher market-to-book ratio, lower tangibility, larger cash flows, higher profitability, higher retained earnings and lower capital expenditures are more likely to have zero debt. Zero-leverage firms are mostly constrained in their debt capacity, implying that the financing situation of the small and medium enterprises is still severe, and that both the small and medium enterprises and the external market should make further efforts.