They tested six and seven-year-olds who were given an opportunity to cheat in a trivia game and then lie about their actions.
Children who were good liars performed better in tests of verbal memory - the number of words they could remember.
This means they are good at juggling lots of information, even if they do tell the odd fib.
Writing in the Journal of Experimental Child Psychology, researchers from the Universities of North Florida, Sheffield and Stirling, recruited 114 children from four British schools for their experiment.
Using hidden cameras during a question-and-answer game, they were able to identify the children who peeked at the answer to a fictitious question, even though they were told not to.
A potentially surprising finding (for parents) is that only a quarter of the children cheated by looking at the answer.
Further questioning allowed the researchers to work out who was a good liar or a bad liar.
They were particularly interested in children's ability to maintain a good cover story for their lie.
In separate memory tests, the good liars showed they had a better working memory for words - but they didn't show any evidence of being better at remembering pictures (visuo-spatial memory).
The researchers said this was because lying involves keeping track of lots of verbal information, whereas keeping track of images is less important.
Dr Elena Hoicka, a developmental psychologist from the University of Sheffield, said there was an upside to having a child who fibs.
"While parents are usually not too proud when their kids lie, they can at least be pleased to discover that when their children are lying well, it means their children are becoming better at thinking and have good memory skills.
"We already know that adults lie in approximately a fifth of their social exchanges lasting 10 or more minutes, so it's interesting to know why some children are able to tell more porkies than others."
She said they now wanted to find out more about how children first learn to lie.
Children who have a good memory are better at telling lies, say child psychology researchers.