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Increases in the abundance or density of woody plants in historically semiarid and arid grassland ecosystems have important ecological, hydrological, and socioeconomic implications. Using a simplified water-balance model, we propose a framework for conceptualizing how woody plant encroachment is likely to affect components of the water cycle within these ecosystems. We focus in particular on streamflow and the partitioning of evapotranspiration into evaporation and transpiration. On the basis of this framework, we suggest that streamflow and evaporation processes are affected by woody plant encroachment in different ways, depending on the degree and seasonality of aridity and the availability of subsurface water. Differences in landscape physiography, climate, and runoff mechanisms mediate the influence of woody plants on hydrological processes. Streamflow is expected to decline as a result of woody plant encroachment in landscapes dominated by subsurface flow regimes. Similarly, encroachment of woody plants can be expected to produce an increase in the fractional contribution of bare soil evaporation to evapotranspiration in semiarid ecosystems, whereas such shifts may be small or negligible in both subhumid and arid ecosystems. This framework for considering the effects of woody plant encroachment highlights important ecological and hydrological interactions that serve as a basis for predicting other ecological aspects of vegetation change—such as potential changes in carbon cycling within an ecosystem. In locations where woody plant encroachment results in increased plant transpiration and concurrently the availability of soil water is reduced, increased accumulation of carbon in soils emerges as one prediction. Thus, explicitly considering the ecohydrological linkages associated with vegetation change provides needed information on the consequences of woody plant encroachment on water yield, carbon cycling, and other processes.