As an important component of formal institutions, the judicial system plays a crucial role in safeguarding the legitimate rights and interests of market entities and guiding the allocation of corporate resources. Using the establishment of circuit courts as a quasi-natural experiment, this study employs a multi-period difference-in-differences model to examine the impact of judicial improvements on corporate financial asset allocation and its underlying mechanisms. The results indicate that the establishment of circuit courts significantly suppresses corporate financial asset allocation. Mechanism tests reveal that circuit court establishment mitigates firms’ cautious motives by reducing operational risks and alleviating financing constraints, and weakens speculative motives by enhancing main business performance and curbing shadow banking activities, thereby guiding funds back into the real economy. Heterogeneity analysis shows that the above inhibitory effect is more pronounced in larger firms, firms with higher asset specificity, and in provinces with lower market competition and higher fiscal pressure. Further analysis indicates that circuit court establishment can significantly curb excessive corporate financial asset allocation without affecting moderate allocation. Moreover, the intensity of judicial activity in circuit courts is significantly negatively correlated with corporate financial asset allocation. This study validates the positive role of judicial improvements from the perspective of corporate asset allocation structure and provides empirical insights for guiding firms to “shift from virtual to real” and promoting high-quality development of the real economy.