Does New Oriental Education and Technology Use Its

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The company gives stock awards to employee teachers who are on the front lines in class rooms and know the statistics about current student enrollment prior to the release of public information. If there stock awards represents a large portion of their income, they are vulnerable to large swings in their income. Are they making quick sales prior to the release of public information? Maybe not, but they must be sorely tempted!

 

On January 15, 2010, one day prior to the release of the second fiscal quarterly report, the shares of EDU dropped  $5.77/share  on a massive 2,116, 900 shares. This volume of transactions is over 5 times its average daily transaction volume over the past three months. Whereas it is difficult to know the origin of these shares, what is known is that the selling occurring one business day before the release of earnings which showed net income to have declined in the reporting period by 63.9% compared to the year-over-year report. 

 

The company argues that U.S. accounting standards do not give a clear picture. It uses different accounting standards to spin a better picture. The lingo involved is "GAAP" (Generally Accepted Accounting Principles) earnings per share and "Non- GAAP" earnings per share. What is so pathetic is that the shares are listed in New York where "GAAP" is the lingua franca of the market place. The uniformity of GAAP earnings is that they ensure accurate comparisons to all potential users. This uniformity of the information makes comparison among industry measures easier.  Unfortunately, the decision makers are in Beijing, but the market place is in New York. Some say Google's problems are that its executives are in California, whereas Baidu's executives are in China and understand regulations better. Hopefully, EDU can learn from the national border issues.

 

Without direct evidence it would be unfair to say that the source of sales is from employees at the firm who have firsthand knowledge of the company's affairs. After all, there are many large financial institutions in the US who own shares in this company. Also, in fairness to the company, the stock dropped 9.6% in the market when its previous quarterly results were released on October 20, 2009. To the company's credit, this drop occurred on the day the earnings were released, not before. As long as the company does not demonstrate controls of insider selling of stock, and as long as some of its employees are on the frontier of cutting edge information, there is a mystery in the mind of the market and such could impair its well earned and admirable reputation.

 

One of the directors of EDU, Dr. John Zhuang Yang, the international Dean of the Beijing International M.B.A. Program at Beijing University, earned his Ph.D. at Columbia University in New York. He then specialized in management. Unfortunately, the company's directors are in the background and the company does not give any information of how his skills in management are mobilized to control the leak of information prior to its dissemination though public media. Nothing is said about how the skills of Mr. Robin Li, Chairman and CEO of Baidu.com, who is also a director, are mobilized in addressing this vulnerability. Are these men just window dressing? Hopefully, not. The company public relation counsel has been asked for information about this subject but has not replied.

 

This company has "quarteritis, " also known as "asymmetric information." It is a pity that the company cannot do a better job of dealing with this problem. Hopefully, EDU will study hard and then earn an A+ in this market-place examination of The Relentless Pursuit of Success.[1]

 

 

[1] This is the title of a book authored by the CEO of EDU