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

In this study, we examine whether managers rank risk factors and list them in order of their importance in Item 1A of the 10-K. We focus on firms’ credit risk disclosures and where they are positioned in Item 1A. Firms that place the credit risk factor closer to the beginning have lower credit ratings and higher bond spreads. They are also more likely to experience future rating downgrades and bankruptcies. Risk factor position, or rank, is a more robust measure of risk than disclosure characteristics examined in prior studies. We also use firms’ proximity to the investment grade threshold as an exogenous disclosure cost measure and find that firms with ratings near the threshold are more likely to move their credit risk factor to a less prominent position. Our study provides evidence on firms’ voluntary risk disclosure behavior and informs the SEC debate on whether to require risk factor ordering.