Perfect World Shares Dropped: What You Need to Know

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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 (NAS: 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.

Want to keep up to date on Perfect World?Add it to your watchlist.

At the time this article was published Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.Fool contributor Matt Koppenheffer does not have a financial interest in any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.

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