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The capital structure problem is the core of the financing decision. When the enterprise needs financing, the first thing must be ensured is establishing the best capital structure, one way is gaining the most before tax profit by internal adjustment, another is making the most earnings per share from financial leverage. Because the capital cost of debt financing is always lower than the cost of equity financing, it can heighten the value of enterprise by using the Financial Leverage Theory reasonably. Secondly, according to the characteristics of its products and service and the situation of market, the enterprise can choose an appropriate way for financing. Theoretically, the relationship between financial leverage and performance cannot be defined so far. Therefore, based on the competitive strategy, a new opinion has been offered in this paper to study the relationship between financial leverage and performance, in order to find the correlation by taking different strategies, and to find the result that how the relationship to affected by the level of the market competition.Therefore, the theories about capital structure, competitive strategy and performance are described firstly. Secondly, the research progress of the domestic and foreign scholars about the relationship is summarized, and there isn’t a specific verdict. Thirdly, theories and conclusions of the domestic and foreign scholars are analyzed by considering competitive strategy and competitive strength. Finally, according to some particular standards, we choose the manufacturing companies in Shanghai Stock Market as samples. Based on the financial data from 2006 to 2009, we use the factorial statistical analysis the competitive strategies of the sample companies, and classify them as the product differentiation and the cost-effective, then competitive strength of market has been computed by Herfindahl Index. On this base, the regression model is made, in order to analyzing the relationship between financial leverage and performance in the competitive strategy model and the competitive strength model. The result shows that by taking different competitive strategies, the relationship are different. Moreover, the fiercer the market competition is, the more significantly financial leverage would be affected.
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