Abstract: The main intention of this study was to examine the relationship between capital structure and performance of commercial banks in Ethiopia. The investigation was based on pannel data (from the year 2000-2012) collected from the annual reports of eight sample commercial banks in the country. This study establish a model to measure the association between capital structure which is proximate by total debt to total asset (TDTA) and total debt to total capital (TDTC) and performance which is measured by return on asset (ROA), return on equity (ROE) and net profit margin (NPM). The results of regression analyses indicate that on average leverage has a positive effect on the financial performance of commercial banks in Ethiopia when performance measured by return on equity. In contrast, the similar analyses indicate that leverage has a significant negative effect on performance of commercial banks in Ethiopia when performance is measured by return on asset and net profit margin. These support both trade off theory and pecking order theory of capital structure. Hence, participants in Ethiopia banking industry should make capital structure at optimal level by raising funds from equity finance by participating in the secondary market in order to enhance its performance in related with capital structure.