Final answer:
A firm with long-term poor stock performance due to an agency conflict may become a target for a corporate raider who sees the potential for restructuring the company for profit.
Step-by-step explanation:
If a firm has experienced an agency conflict resulting in a poorly performing stock for an extended period, it may attract the attention of a corporate raider. Agency conflicts occur when there is a misalignment of interests between the managers of a firm and its shareholders. Managers have more information about the firm’s potential for future profits, while shareholders depend on publicly available information. Over time, as a firm becomes more established and its financials are more transparent, outside investors, such as bondholders and shareholders, may feel more comfortable investing without personal knowledge of the managers due to the widespread availability of information about the company’s operations and finances. However, a persistent underperformance caused by agency conflicts might signal to a corporate raider that the firm is undervalued or mismanaged and, hence, a potential takeover target. This is because a raider will see an opportunity to acquire the firm, typically at a low cost due to its poor stock performance, and either restructure it to unlock hidden value or sell off parts of it for a profit. A corporate raider is motivated by the potential to earn substantial returns from these strategies.