Aims.: Children of parents with psychiatric disorders are at risk of poor outcomes. However, there is limited evidence regarding the relationship between parental psychiatric disorders and child school readiness, which is linked to later academic achievement. This study aims to investigate these relationships and broaden the evidence underlying the rationale for family-focused interventions for parental psychiatric disorders. Method.: This study used linked administrative data. Children's school readiness in multiple developmental domains (physical, social, emotional, communicative, cognitive) was measured by the Australian Early Development Census (AEDC) for 19 071 Western Australian children (mean age 5.5 years). Children scoring in the bottom 25% on any AEDC domain were considered developmentally vulnerable, or at risk of vulnerability, on that domain. Biological child–parent pairs were identified using birth records. Parents with psychiatric disorders were identified from hospital records, which included information on diagnosis and frequency/duration of psychiatric admissions. Logistic regressions, adjusted for parent age, mother's marital status, child Aboriginality, child English language status, local community remoteness and socioeconomic index, estimated the odds of children being vulnerable/at-risk on each of the AEDC domains. Results.: A total of 719 mothers and 417 fathers had a psychiatric hospitalisation during the study period (12 months prior to the child's birth, up to the end of 2009). Children whose parents had psychiatric disorders had increased odds of being classified as vulnerable/at-risk for school readiness. This increase in odds was evident for both maternal (adjusted odds ratio, aOR 1.37– 1.51) and paternal psychiatric disorders (aOR 1.38–1.50); and for a single admission of one day (aOR 1.32–1.59), a single admission of multiple days (aOR 1.30–1.47), and multiple admissions (aOR 1.35–1.63). Some variability in child outcome was found depending on the parents’ psychiatric diagnosis (mood, anxiety, substance abuse or comorbid disorder). Conclusions.: Children of parents who have been hospitalised with psychiatric disorders are at risk for poor school readiness. These findings add support to recommendations that mental health professionals consider dependent children in discharge and treatment planning for adult psychiatric inpatients. It is also important to ensure that the impact of psychiatric illness in fathers is not overlooked in assessment and intervention. Family-based approaches to adult psychiatric care could meet the dual needs of intervention for parents and preventative measures for children. These findings can inform policy regarding the importance of integrating and coordinating services to meet the needs of families.