Young Ceddie (Freddie Bartholomew) lives with his American mother. His long-dead father was a British earl disowned by his grandfather, the Earl of Dorincourt (C. Aubrey Smith), who disapproved of all Americans. With his sons dead, the earl decides to recognize Ceddie as his heir. The stern and ill-tempered old man is soon won over by Ceddie’s kindness and honesty. As the family begins to come together, trouble arrives when another woman insists her son is the earl’s true heir.

Little Cedric Errol (Bartholomew) grows up in Brooklyn in the 1880’s under the care of his mother whom he simply calls Dearest (Costello). This is what his late father, the third son of the Earl of Dorincourt, had called Ceddie’s mother and so Ceddie does the same. Due to the casting Ceddie also speaks with his father’s accent which actually turns out to be a nice touch in helping to stress his attachment to his parents. Ceddie and Dearest are the closest of friends.

After Dearest gives Ceddie a bicycle he goes off on his daily adventures and we meet his closest friends, Dick the boot-black (Rooney) and shopkeeper Mr. Hobbs (Kibbee). It’s while passing the time with Mr. Hobbs that Dearest’s servant, Mary (Una O’Connor), comes to retrieve him and brings Ceddie home to meet Mr. Havisham (Stephenson).

Mr. Havisham has come from England under the employ of the Earl of Dorincourt (Smith) with orders to retrieve Ceddie to his castle across the sea and set him up as the Earl’s successor. “So this is little Lord Fauntleroy,” says Mr. Havisham upon meeting Ceddie.

The situation is explained and Ceddie soon thinks his grandfather, the Earl, must be a fine man because he’s instructed Mr. Havisham to let Ceddie have anything he wants. It is Ceddie whose every whim is to help others. But since he’s able to provide this aid by way of the Earl’s great fortune the young boy transfers all of his own goodness onto his grandfather, whom we know is far from an admirable sort long before we meet him.

What Ceddie is not told, but is explained to Dearest and us, is that his supposedly kind grandfather refuses to have anything to do with Dearest. Thinking Americans vulgar in general and having distanced himself from his son while he was still alive for having married one, the Earl allows Dearest to accompany her Ceddie to England but she has to live in a separate house and have no contact whatsoever with the Earl.

The revelation to Ceddie of his separation from Dearest is actually better accomplished in the movie than in the novel as Ceddie is not told of their parting until after having arrived in England in the film. He’s better prepared in the novel. Ceddie is heartbroken in each case but follows Dearest’s instructions not to question his grandfather about the situation the old man has imposed.

While Ceddie spends one last evening with Dearest, Mr. Havisham returns to the Earl’s castle to inform his employer about his impressions of the boy. The Earl has low expectations and finds fault with everything Mr. Havisham tells him. But when the Earl meets Ceddie the next morning he quickly finds himself disarmed by the boy’s innocent nature and a great companionship begins to form as the Earl presumes to teach Ceddie about his responsibilities while Ceddie instead shows the Earl how those responsibilities are best used.

Just as the formerly cranky old Earl becomes most attached to Ceddie the boy’s role as his heir comes under threat from an outsider. The situation appears completely helpless until the American papers reveal a rather big coincidence to Dick the bootblack who undertakes to save Ceddie’s position as Lord Fauntleroy with the assistance of Mr. Hobbs.