ABSTRACT
This study sought to examine the
impact of Nigeria’s economic growth on the Nigerian capital market by
investigating the impact of economic growth on the Nigerian Stock Exchange
market capitalization ratio; impact of economic growth on the Nigerian Stock
Exchange turnover ratio; impact of economic growth on the Nigerian Stock
Exchange value traded ratio; impact of economic growth on new issues in the
Nigerian Stock Exchange; impact of economic growth on the number of listings in
the Nigerian Stock Exchange and causal relationship between economic growth and
capital market growth indicators in Nigeria. The ex- post facto research
design was used and time series data for the 15 -year period, 1996-2010, were
collated from the Central Bank of Nigeria Statistical Bulletins, the Securities
and Exchange Commission Statistical Bulletin and the Nigerian Stock Exchange
Factbooks. The two-stage least squares (2SLS) regression model was used to
estimate the impact of economic growth on conglomerate indices of the Nigerian
Stock Exchange for hypotheses one to five while the Granger causality f-statistics
was used to test hypothesis six. Values of Stock Market Capitalization Ratio
(SMCR), Stock Market Turnover Ratio (SMTR), Stock Market Value Traded Ratio
(SMVTR), Stock Market New Issues Ratio (SMNIR) and Stock Market Number of
Listings (NSM) were used as proxies for capital market development and adopted
as the dependent variables, while the independent variable was the Gross
Domestic Product Growth Rate (GDPGR), used as proxy for economic growth. Six
hypotheses were considered and descriptive statistics on both the dependent and
independent variables were computed. The study found, among others, that
economic growth has a positive and non-significant impact on the market
capitalization ratio of the Nigerian Stock Exchange (coefficient of SMCR=0.42,
t-value = 1.19). Economic growth has a positive and significant impact on the
Nigerian stock market turnover ratio (coefficient of SMTR= 0.17, t-value =
29.21). Economic growth has a positive and non-significant impact on the
Nigerian stock market value traded ratio (coefficient of SMVTR= 0.00, t-value =
1.66). Economic growth has a positive and non-significant impact on the new
issues ratio of the Nigerian stock exchange (coefficient of NIR = 0.00, t-value = 0.03). Economic growth has a negative and non-significant
impact on the number of listings in the Nigerian stock market (coefficient of
NSM = -0.00, t-value = -0.70). Economic growth and all capital market growth
indicators employed do not Granger-cause each other. However, the various
capital market growth indicators used Granger-cause each other, and, thus, bi-directional,
except for the unidirectional causality running from the Nigerian stock market
turnover ratio to the value traded ratio. The study, therefore, recommends,
amongst others, that government provides the enabling environment for the
economy to thrive in order for the Nigerian capital market to achieve the
desired world-class status and compete favourably in international capital
markets, the strengthening of legislative and regulatory framework governing
the capital market in Nigeria to conform to the legislative and regulatory
standards of advanced capital markets. These will increase the confidence of
local and foreign investors to patronize the market and save through the
mechanism which the market provides. The channeling of these savings into productive
investments will further engender the country’s economic growth and
development.
CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study
According to Al-Faki (2006), the
capital market is a “network of specialized financial institutions, series of
mechanisms, processes and infrastructure that, in various ways, facilitate the
bringing together of suppliers and users of medium- to long- term capital for
investment in socio-economic developmental projects”. The capital market is divided
into the primary and the secondary market. The primary market, or the new
issues market, provides the avenue through which government and corporate
bodies raise fresh funds through the issuance of securities that are subscribed
to by the general public or a selected group of investors. The secondary market
provides an avenue for the sale and purchase of existing securities.
A large pool of theoretical
evidence exists locally and internationally showing that capital market growth
boosts economic growth. Carlin and Mayer (2003) show that the capital market
impacts economic growth, though not as strongly as the banking sector.
Greenwood and Smith (1997) show that large stock markets can decrease the cost
of mobilizing savings, thus facilitating investment in most productive
technologies. Levine (1991) and Bencivenga, et al (1996) argue that stock
market liquidity, which is the ability to trade equity easily and cheaply, is
crucial for growth. Many profitable investments require a long-run commitment
of capital but savers are reluctant to relinquish control of their savings for
long periods. Liquid equity markets address this challenge by providing assets
which savers can sell quickly and cheaply. Simultaneously, firms have permanent
access to capital raised through equity issues. Kyle (1984) and Holmstrom and
Tirole (1993) argue that liquid stock markets can increase incentives for
investors to get information about firms and improve corporate governance while
Obstfeld (1994) shows that international risk-sharing, through internationally
integrated stock markets, improves resource allocation and can accelerate the
rate of economic growth.
These arguments on the importance
of stock market development in the growth process are supported by various
empirical studies, such as Levine and Zervos (1993, 1996, and 1998); Atje and
Jovanovic (1993), and Demirguc-Kunt (1994). Filer, et al (1999) find that an
active equity
Stock exchanges exist for the
purpose of trading ownership rights in firms, and are expected to accelerate
economic growth by increasing liquidity of financial assets, making global
risk-diversification easier for investors, promoting wiser investment decisions
by savings-surplus units based on available information, compelling corporate
managers to work harder in shareholders’ interests, and channeling more savings
to corporations (Greenwood and Jovanovic, 1990 and King and Levine, 1993). In
accord with Levine (1991), Bencivenga, et al (1996) emphasise the positive role
of liquidity provided by stock exchanges on the size of new real asset
investments through common stock financing. Investors are more easily persuaded
to invest in common stocks when there is little or no doubt on their
marketability in stock exchanges. This, in turn, motivates corporations to go
public when they need more finance to invest in capital goods.
Stock prices determined in
exchanges, and other publicly available information, help investors make better
investment decisions. Better investment decisions by investors mean better
allocation of funds among corporations and, as a result, a higher rate of
economic growth. In efficient capital markets, prices already reflect all
available information, and this reduces the need for expensive and painstaking
efforts to obtain additional information (see, Stiglitz, 1994).
On a broader scope on the debate
on whether financial development engenders economic growth or whether financial
development is consequential upon increased economic activity, Schumpeter
(1912) opined that technological innovation is the force underlying long-run
economic growth, and that the cause of innovation is the financial sector’s
ability to extend credit to the “entrepreneur” (Filer, et al, 1999) while
Robinson (1952) claims that it is the growth of the economy that causes
increased demand for financial services which, in turn, leads to the
development of financial markets......
================================================================
Item Type: Postgraduate Material | Attribute: 137 pages | Chapters: 1-5
Format: MS Word | Price: N3,000 | Delivery: Within 30Mins.
================================================================
No comments:
Post a Comment