With the deepening of judicial system reform in China, the influence exerted by the “de-localization” of judicial adjudication power on the financing behaviors of market entities has become increasingly prominent. For firms characterized by high rent-seeking, which typically depend on non-market arbitrage channels, structural shifts in their financing costs offer a clearer lens through which the constraining effect of enhanced judicial independence on covert institutional arbitrage can be observed. Leveraging the quasi-natural experiment presented by the establishment of circuit courts in China, this study investigates the impact of this institutional innovation on the cost of equity capital for high rent-seeking firms. It is found that the establishment of circuit courts leads to a significant reduction in their cost of equity. Analysis of the underlying channels indicates that this reduction is achieved through the optimization of the contractual trust environment and a decrease in market segmentation. Furthermore, heterogeneity tests reveal that the effect is more pronounced for firms with extensive non-local subsidiaries, greater reliance on external financing, and higher asset specificity. Additional analysis demonstrates that the establishment of circuit courts is associated with a decrease in corporate misconduct. This study provides empirical evidence supporting the specific channel through which judicial reform influences capital markets, namely legal deterrence, while also offering practical insights for firms navigating evolving legal landscapes in their financial decision-making.