Cotton is one of the most economically important crops in the world, and drought is a key abiotic factor that can significantly reduce cotton yield. MADS-box transcription factors play essential roles in various aspects of plant growth and development as well as responses to biotic and abiotic stress. However, the use of MADS-box transcription factors to regulate water stress responses has not been fully explored in cotton. Here, we showed that GhAGL16 acts as a negative regulator of water deficit in cotton, at least in part by regulating ABA signaling. GhAGL16-overexpressing (GhAGL16-OE) transgenic Arabidopsis had lower survival rates and relative water contents (RWCs) under water stress. Isolated leaves of GhAGL16-OE Arabidopsis had increased water loss rates, likely attributable to their increased stomatal density. GhAGL16-OE Arabidopsis also showed reduced primary root lengths in response to mannitol treatment and decreased sensitivity of seed germination to ABA treatment. By contrast, silencing GhAGL16 in cotton enhanced tolerance to water deficit by increasing proline (Pro) content, increasing superoxide dismutase (SOD) and peroxidase (POD) activities, and reducing malondialdehyde (MDA) and hydrogen peroxide (H2O2) contents under water stress. Subcellular localization and transcriptional activation assays confirmed that GhAGL16 is a nuclear protein that lacks transcriptional self-activation activity. The expression of ABA biosynthesis-related genes (GhNCED3/7/14), a catabolism-related gene (GhCYP707A), and a gene related to the ABA signaling pathway (GhABF4) was altered in GhAGL16-silenced plants. Taken together, our data demonstrate that GhAGL16 plays an important role in cotton resistance to water stress.