The rule of law is the basic way of running a country, and the geographical rotation of judges is an important policy of governing a country according to law in the new era. Studies on this policy have mainly investigated its impact on the macro economy, but there is still a lack of in-depth research on how it affects the micro subject. Capital structure is an important financial decision of a corporate. Existing literature suggests that external risks can affect the choice of capital structure of a company. However, how litigation risk, as an important external risk of a company, affects the decision of corporate capital structure is not fully studied. To empirically test the effect of litigation risk on corporate capital structure, one needs to overcome the endogeneity problem. Litigation risk is a kind of risk that is difficult to be measured, so there remains significant concern as to the appropriate measure for litigation risk. Furthermore, it is likely impossible to control for all factors that affect both litigation risk and capital structure. In this paper, we attempt to identify the causal effect of litigation risk on corporate capital structures by exploiting the quasi-natural experiment created by the geographical rotation of judges of the higher people’s court of China. The quasi-natural experiment approach has two advantages when addressing the identification concerns. First, the exogenous shock of geographical rotation of judges can cause the change of litigation risk. Second, this approach can absorb constant unobserved differences between the treatment group and the control group. By increasing litigation risk, the geographical rotation of judges increases the incentive for corporate to maintain financial flexibility. The research results of the difference-in-differences method suggest that the geographical rotation of judges reduces the financial leverage by 4.67%. In the cross-sectional analysis, samples are grouped from three dimensions: litigation rate of the industry in which the company is located, marketization degree of the company’s location and financing constraints faced by the company, to further verify the effect of litigation risk on corporate capital structure. The effect is more pronounced in higher litigation risk industry, lower degree of marketization, and larger financial constraints faced by the company. The research results of this paper not only provide new empirical evidence for the economic consequences of geographical rotation of judges from the perspective of corporate financial decision-making, but also have certain enlightening significance for the national strategy of the rule of law and the improvement of judicial impartiality.