Village governance is the practice of national governance at the most basic unit. The Third Plenary Session of the 20th Central Committee of the Communist Party of China pointed out that, by 2035 the modernization of the national governance system and governance capacity will be basically achieved. This sets higher requirements for grassroots village governance. This paper uses data from the “Thousand-village Survey” conducted by Shanghai University of Finance and Economics in 2019, and employs various empirical methods to explore the impact of village mergers on village governance performance. The results show that village mergers significantly improve village governance performance. Mechanism testing indicates that village mergers improve village governance performance through the two channels of establishing more standardized village institutions and enhancing villager participation in village affairs. Heterogeneity analysis shows that village mergers due to inconvenient transportation and natural disasters can significantly improve village governance performance, while the effect of village mergers due to population decline is not significant. Further research finds that village mergers have a sustained long-term effect on improving village governance performance. It is advocated that the evaluation of village mergers should not only focus on the present, but also on the long-term promotion effect of the policy lag on village governance. The policy implications are as follows: First, we should promote village mergers steadily and orderly, optimize village layout, and improve village governance performance. Second, we should improve the mechanism for villager participation, smooth channels for villagers to express their demands, and enhance villager participation in village affairs. Third, we should establish more standardized village institutions, enhance transparency and legitimacy, and increase villager compliance. This paper evaluates the policy effect of village mergers on rural governance, provides village-level evidence for grassroots governance research, and has certain reference value for advancing rural revitalization and modernization of agriculture and rural areas.