Voluntary Disclosure Through the Prominence of Risk Factors in the 10-K

Authors:
Michael Chin, assistant teaching professor of accounting, Whitman School of Management
Yue Liu, Southwestern University of Finance and Economics
Kevin Moffitt, Rutgers Business School

Journal:
Contemporary Accounting Research (2026)


Summary:
Our study finds that the order of risk disclosures in a 10-K, and not just what they say, reflects a firm’s actual risk exposure. The position of a risk disclosure can help investors predict whether the firm will experience a related negative outcome in the future.

Research Questions:

• Is the relative prominence of individual risk factors within Item 1A associated with firms’ underlying exposure to those risks?
  
• Does risk factor prominence contain information that is incremental to the textual attributes of Item 1A disclosures and other observable risk measures?
  
• Can risk factor prominence be used to predict future adverse outcomes?
• Is risk factor prominence more informative during periods of high information uncertainty?

What we know:
Item 1A risk factor disclosures are often criticized as lengthy and boilerplate, even though prior research finds their text provides valuable information about firm risk. Our study shows these disclosures also convey useful information through the prominence of individual risks within the 10-K. Specifically, the order of risk factors reflects a firm’s underlying risk exposure and complements the disclosures’ textual content. By highlighting this additional dimension, our study broadens the view of what makes Item 1A informative for investors, analysts, lenders, auditors, boards, regulators and other capital-market participants.

Novel Findings:
This study examines the prominence of two economically significant risk factor disclosures: credit risk and goodwill risk. We assign each risk factor a prominence score based on its position in Item 1A, with higher scores given to factors appearing earlier in the section. We find that risk factor prominence is associated with proxies for underlying risk and predicts future adverse outcomes, including credit rating downgrades, bankruptcy filings and goodwill impairments. This information is incremental to that provided by other risk disclosure attributes, as well as accounting- and market-based risk proxies. The study also finds that prominence is more informative during periods of high information uncertainty.

Implications for Research:
This study may encourage future research to expand the study of disclosure ordering and prominence into new settings. Prior research examines prominence primarily in earnings announcements and other disclosure contexts; our study shows that ordering is also informative in Item 1A risk factor disclosures, a setting involving negative, hard-to-verify risk information. Because the ordering of risk factors is voluntary and less constrained by litigation concerns than the disclosure text itself, it offers a useful setting for examining risk disclosure behavior, managerial incentives and disclosure informativeness. Future research can build on this insight by studying how firms use ordering and prominence in other disclosures and by examining when these structural features provide information beyond textual content.

Full Citation:
Chin, M., Liu, Y. and Moffitt, K. Forthcoming. “Voluntary Disclosure Through the Prominence of Risk Factors in the 10-K,” Contemporary Accounting Research.

Abstract:
Prior research finds that the text of Item 1A risk factor disclosures provides valuable information about firm risk. But less is known about whether the ordering of these disclosures conveys useful information. We examine whether the relative prominence of individual risk factors within Item 1A reflects a firm's underlying risk exposure and predicts future adverse outcomes. Focusing on credit and goodwill risk disclosures, we find that risk factor prominence is associated with proxies for underlying risk and predicts credit rating downgrades, bankruptcy filings and goodwill impairments. We also find that prominence is more informative during periods of high information uncertainty, when the benefits of risk disclosure are expected to be greater. Overall, our findings suggest that risk factor prominence offers a valuable signal of firm risk that complements the textual disclosures in Item 1A. Investors, analysts, lenders, auditors, boards and regulators should consider both the level of, and changes in, risk factor prominence when evaluating firm risk.