Perfect World Shares Dropped: What You Need to Know

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Chinese online game developer Perfect World (Nasdaq: PWRD  ) were hoping for a do-over on Monday after plunging as much as 30% in intraday trading as rumors about fraud made the rounds.

So what: The plunge in Perfect World's shares is a perfect example of just how skittish investors are about small-cap Chinese stocks after some high-profile frauds were uncovered in the group. The "news" behind Perfect World's swoon hasn't been widely covered, but it appears that investors started hammering the sell button after a blog on Tianya -- a Chinese social-networking site -- alleged that there was an investigation going on at Perfect World.

The latest scuttlebutt notes that the blog post has been removed from Tianya and the company -- through a Wall Street research analyst -- has refuted the claims. It's expected that the company will also issue a press release to refute the allegation publicly.

Now what: Like some of my fellow Fools, investing in Chinese companies -- particularly smaller ones -- makes me a bit uneasy. However, for those that have been willing to take on the risk of the group, a scare like this could prove to be a great buying opportunity. If the blog post has, in fact, disappeared and the company puts its foot down to say that the claims are categorically untrue, the stock could have a nice rebound in short order.

At this point, that outcome seems pretty likely. A sure thing though? After what we've seen from China small caps -- and some not-so-small caps -- over the past couple of years, I wouldn't call anything a sure thing.

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