Using the quasi-natural experiment of bankruptcy courts established, this study examines the impact of a surge in potential bankruptcy litigation risk driven by judicial reform on firms' special joint venture arrangements. The findings reveal that the establishment of bankruptcy courts significantly increases the number of special joint venture arrangements, primarily by heightening firms'perception of bankruptcy litigation risk and elevating stakeholders'attention to corporate bankruptcy risk. The positive effect on the number of special joint venture arrangements is more pronounced in regions with lower judicial quality and efficiency prior to the establishment of bankruptcy courts, as well as in firms whose subsidiaries exhibit higher bankruptcy risk. Enterprises tend to achieve special joint venture arrangements more through restructuring existing investment entities rather than establishing new ones, and such arrangements are more frequently located in regions where bankruptcy courts have been set up. Furthermore, while firms'debt financing costs decrease due to the debtor credit protection effect, their equity financing costs rise owing to heightened perceived bankruptcy litigation risk. Special joint venture arrangements can, to some extent, alleviate firms'equity financing difficulties. The conclusions offer insights for improving market exit mechanisms and optimizing the business environment, and provide practical guidance for regulators and stakeholders in better assessing corporate bankruptcy risk.