Determining the optimal capital structure is one of the most fundamental policy decisionsrnfaced by financial managers. Since optimal debt ratio influences firm's value, differentrnfirms determine capital structures at different levels to maximize the value of their firms.rnThus, this study examines the relationship between leverage and firm specificrn(profitability, tangibility, growth, risk, size and liquidity) determinants of capitalrnstructure decision, and the theories of capital structure that can explain the capitalrnstructure of banks in Ethiopia. In order to investigate these issues a mixed methodrnresearch approach is utilized, by combining documentary analysis and in-depthrninterviews. More specifically, the study uses twelve years (2000 - 2011) data for eightrnbanks in Ethiopia.rnThe findings show that profitability, size, tangibility and liquidity of the banks arernimportant determinants of capital structure of banks in Ethiopia. However, growth andrnrisk of banks are found to have no statistically significant impact on the capital structurernof banks in Ethiopia. In addition, the results of the analysis indicate that pecking orderrntheory is pertinent theory in Ethiopian banking industry, whereas there are little evidencernto support static trade-off theory and the agency cost theory. Therefore, banks shouldrngive consideration to profitability, size, liquidity and tangibility when they determinerntheir optimum capital structure