The design of dam bodies for underground reservoirs must account for how water affects shear failure and the evolution of fractures in coal pillars. In this work, we detect acoustic emissions in raw coal samples with different water content (0%, 5.35%, 17.88%, and 20.40%) and under uniaxial compression shear and use computed tomography to analyze the failed samples. The results show that the shear strength, shear displacement, cohesion, and internal friction angle all decrease with increasing water content, which is described by the revised Mohr‐Coulomb model for the case of water intrusion. The acoustic emission counts correlate strongly with the change in stress, and the cumulative acoustic emission counts are combined with shear stiffness to separate the fracture evolution process into five stages: crack closure, elastic deformation, stable crack propagation, unstable crack propagation, and failure. The ratios of the crack closure, initiation, and damage stress to the corresponding peak shear stress are essentially unaffected by the water content. Most cracks are tensile cracks, and an increase in the water content promotes the development of parallel fractures. These results are helpful for determining the size of coal pillars in underground reservoirs and for solving other underground engineering problems, such as support for water‐rich coal roadways.