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

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

Journal:
Contemporary Accounting Research (2026)


Summary:
When companies file their annual reports, known as 10-Ks, they must include a section listing their major risks. Our research shows that investors should pay attention not only to what companies say about those risks, but also to how they arrange them. Companies tend to put more serious risks near the top of the list, and investors can use a risk’s position to anticipate whether that risk will turn into a real problem.

Research Questions:

• Do companies reveal which risks are most important through the order in which those risks appear in their annual reports?
• Does the order of risk disclosures tell us something that we can't easily learn from the text or other financial 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:
Companies may reveal important information about their risks through the order in which they list them. We studied two major risks that companies disclose in their 10-K filings: credit risk and goodwill risk. When companies present these risks more prominently, it signals that they are more likely to experience credit downgrades, bankruptcy or goodwill impairments, which are write-downs recorded when an acquired business loses value. In other words, risk disclosure ordering helps predict negative outcomes, beyond what investors can learn from the disclosure text or other common risk measures.

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.

Implications for Practice:
Investors, analysts, lenders, auditors and boards read risk disclosures to understand the risks companies face. Our study suggests they should consider another dimension of those disclosures: not just what companies say, but how they arrange the risks they disclose. By observing which risk disclosures appear near the top of the list or move higher over time, users can identify risks that deserve closer attention.

Implications for Policy:
Regulators have long worried that 10-K risk disclosures can be lengthy and boilerplate. Our findings show that these disclosures can still provide meaningful information in a place users often overlook: the order in which companies present their risks. The SEC has considered requiring companies to rank risks by importance, but our study shows that companies already provide informative risk ordering without such a rule. This evidence can help inform future debates about how to make risk disclosures clearer and more useful to investors.

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.