The paper investigates the effect of foreign aid on governance. Foreign aid’s effect on the quality of governance remains a widely debated topic. Theory provides conflicting guidance on this and the empirical record of previous research is not conclusive and often contradictory. Our research on a sample of South Asian and East Asian countries suggests that aid can have a positive effect on governance when controlling for other country factors. The estimated results also suggest that multilateral aid has a positive effect on the quality of governance, but the effect of bilateral aid on the quality of governance is either negative or insignificant. These results have important policy implications for donor countries and multilateral institutions alike.