In sanitation policies, "improved sanitation" is often broadly described as a goal with little rationale for the minimum standard required. We conducted a secondary analysis of data collected as part of a cluster randomized controlled trial in rural Ethiopia. We compared the performance of well-constructed and poorly constructed pit latrines in reducing child diarrhea. In addition, we explored whether having a well-constructed household latrine provides indirect protection to neighbors if cluster-level coverage reaches a certain threshold. We followed up children aged younger than 5 years (U5C) of 906 households in rural areas of the Gurage zone, Ethiopia, for 10 months after community-led total sanitation interventions. A study-improved latrine was defined as having all the following: pit of ≥2 m depth, slab of any material, drop-hole cover, wall, roof, door, and handwashing facilities (water and soap observed). U5C in households with a study-improved latrine had 54% lower odds of contracting diarrhea than those living in households with a latrine missing 1 or more of the characteristics (adjusted odds ratio [aOR]=0.46; 95% confidence interval [CI]=0.27, 0.81; P=.006). Analyses were adjusted for child age and sex, presence of improved water for drinking, and self-reported handwashing at 4 critical times. The odds of having diarrhea among those with an improved latrine based on the World Health Organization/UNICEF Joint Monitoring Program (JMP) definition (i.e., pit latrines with slabs) were not substantially different from those with a JMP-unimproved latrine (aOR=0.99; 95% CI=0.56, 1.79; P=.99). Of U5C living in households without a latrine or with a study-unimproved latrine, those in the high-coverage villages were less likely to contract diarrhea than those in low-coverage villages (aOR=0.55; 95% CI=0.35, 0.86; P=.008). We recommend that academic studies and routine program monitoring and evaluation should measure more latrine characteristics and evaluate multiple latrine categories instead of making binary comparisons only.