A Tale of Two “Orientals”: Lessons from Short Selling Attacks

The case focuses on the main issues faced by two US-listed Chinese companies – Orient Paper (NYSE MKT: ONP) and New Oriental Education and Technology Group (NYSE: EDU) – when they were attacked by Muddy Waters, LLC. Interestingly, the seemingly similar responses of the two “Orientals” resulted in widely disparate outcomes, offering lessons to emerging market firms eager to embrace the global capital markets. The case aims to help students understand the mechanism of short selling in the context of “bear” attacks, and expose the problems that attract short sellers’ attention, as well as the actions companies can take to deal with them. It also explains the normative role that short selling plays in the market: to discipline corporate behaviour and improve market efficiency.

The case is suited for any (or all) of the following purposes: 1. To introduce the process of short selling and the parties involved. 2. To identify the common problems that tend to attract “bear” attacks, from the experience of the two Orientals and other examples. Four categories are described in detail. 3. To explore actions that companies can take in dealing with short selling. A bear attack is not necessarily bad for a company; a plunge in the stock price in the short term creates an opportunity for good companies (as well as top management) to legally buy back shares at a lower price. 4. To understand the normative implications of short selling as part of ‘the invisible hand of the market’ to discipline corporate incentives.