ABSTRACT
The issue of whether capital
market development has any direct impact on economic growth has/is still been
debated in academic literature. Earlier research in this area of finance had
emphasized the role of the banking sector in economic growth; however, the
recent surge in capital markets activities with emerging markets like Nigeria
accounting for a large amount of this boom has led to focus on the linkage between
capital markets development and economic growth especially on its impact on the
real sectors of these economies. The real sector of an economy is where goods
and services are produced through the combined utilization of raw materials and
other productive factors such as labour, land and capital and it comprises the
agricultural, industrial, building and construction, and services sector of an
economy. In Nigeria, despite the opportunities which the capital market
provides through the provision of surplus funds, the growth of the real sector
of the Nigerian economy has remained stunted. Problems such as the
inaccessibility of funds by real sector firms from the capital market due to
stringent listing requirements and conditionalities, lack of depth and breadth
of the capital market to cater for the need of real sector firms among other
challenges, have been attributed as major factors inhibiting the growth of the
real sector of the Nigerian economy. It is against this background therefore,
that this study sought to appraise and analyze the impact of the new issues
market, market capitalization, turnover ratio and value of share traded ratio
of the Nigerian capital market on real sector of the Nigerian economy. The
study adopted the ex- post facto research design and annualized
cross-sectional data for a 24-year period, 1987-2010, were collated from the
Nigerian Stock Exchange Fact Books for the period. Four hypotheses were
proposed and tested and descriptive statistics and graphs were also used to
complement the regression results. The results from this study found that the
new issues market of the Nigerian capital market has a positive and significant
impact on agricultural output (coefficient of NIR = 0.04, t-value = 5.13; p =
0.00 < 0.05) but negative and significant on industrial output (coefficient
of NIR = -0.05, t-value = -5.03; p = 0.00 < 0.05). Market capitalization has
positive and significant impact on agricultural output (coefficient of Mcap =
0.01, t-value = 3.96; p = 0.00 < 0.05) but had negative and significant
impact on industrial output (coefficient of Mcap = -0.01, t-value = -6.98; p =
0.00 < 0.05). Turnover ratio of the Nigerian capital market
had positive and significant impact on agricultural output (coefficient of TVR
= 0.68, t-value = 7.07; p = 0.00 < 0.05) but negative and significant impact
on industrial output (coefficient of TVR = -0.59, t-value = -4.47; p = 0.00
< 0.05). And value of share traded ratio of the Nigerian capital market had
positive and significant impact on agricultural output (coefficient of VSTR =
0.058, t-value = 5.55; p = 0.00 < 0.05) but negative and significant impact
on industrial output (coefficient of VSTR = -0.0619, t-value = - 5.77; p = 0.00
< 0.05). The study, therefore, amongst others recommends that policies that
will impact positively on the real sector, especially the agricultural and
manufacturing subsectors of the Nigerian economy where it concerns funding,
should be pursued with all the seriousness it deserves if Nigeria is to achieve
her desire to be one of the top twenty economies in the world by the year 2020.
Therefore, this study contributed, empirically to provide evidence on the
impact of the capital market on the real sector of the Nigerian economy.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND
OF THE STUDY
The issue of whether capital
market development has any direct impact on economic growth has been debated in
the academic literature. The early proponents of finance-led economic growth
include Bagehort (1873), Schumpeter (1911) and Hicks (1969). Bagehort (1873)
and Schumpeter (1911) argue strongly for the important role capital market
development plays in promoting economic growth. They support their claim by
arguing that the industrial revolution in England was the result of a
functioning capital market that was instrumental in mobilizing and allocating
long-term capital to the productive enterprises of the country. Their position
was buttressed by Hick (1969), who argued that a well functioning banking
system provides intermediation services to productive entrepreneurial
activities that spur technological, innovative, and productive activities that
increase real sector growth.
On the other hand, Robinson (1952)
indicates that demand-pull initiatives from the private sector growth have the
propensity to spur the financial sector to respond to financial or capital
needs of the private sector. In her view, real sector developments (growth) and
financial needs create the demand for a certain financial structure (equity
versus debt) to cater to the needs of the private sector. Lucas (1988), in
support of Robinson’s position, argues that the proponents of finance led
growth exaggerate the impact of capital market development on real sector
growth
However, ever since the pioneering
contributions of Gurley and Shaw (1955, 1960, 1967), McKinnon (1973) and Shaw
(1973), the relationship between financial development and
Earlier research in this area of
finance emphasized the role of the banking sector in economic growth, however,
since in the past decade when the world stock markets surged with emerging
markets accounting for a large amount of this boom (Demirguc-Kunt and Levine
(1996a), recent research, therefore, begun to focus on the linkages between the
stock markets and economic development as new theoretical work began to show
how stock market development might boost long-run economic growth with new
empirical evidence supporting this view that stock market development plays an
important role in predicting future economic growth (see, Demirguc-Kunt and
Levine, 1996a; Singh, 1997; Levine and Zervos, 1998).
Beginning from the 1990s, these
empirical literatures illustrated the importance of financial sector
development for economic growth, however, despite this growing consensus, it
could be seen that the link between finance and growth in cross-country panel
data has weakened considerably over time. At the very time that financial
sector liberalization spread around the world, the influence of financial
sector development on economic growth has diminished (see, Rousseau and Wachtel,
2007). Thus, the strongest elements of the modern economists’ canon are that
financial sector development has a significant impact on economic growth. No
wonder, a generation ago, economists like Goldsmith (1969) saw the relationship
and gave attention to the benefits of financial structure development and
financial liberalization and McKinnon (1991) contributed by agreeing that the
widespread flows of saving and investment should be voluntary and significantly
decentralized in an open capital market close to equilibrium interest rates.
However, the seminal empirical
work that established the growth-finance link is King and Levine (1993), which
extended the cross-country framework introduced in Barro (1991) by
adding
financial variables such as the ratios of liquid liabilities or claims on the
private sector to gross domestic product (GDP) to the standard growth
regression. They found a robust, positive, and statistically significant
relationship between initial financial conditions and subsequent growth in real
per capita incomes for a cross-section of about 80 countries. In the subsequent
decade numerous empirical studies expanded upon this, using both cross-country
and panel data sets for the post-1960 period (see Levine, 1997; Levine, 2005;
Temple, 1999).
Most existing literature on
relationship between the capital market and the economy has focused on the
contributions of the financial intermediaries to economic growth (World Bank
(1989), in fact, Levine (1997) and Liu (1998) and numerous empirical tests have
shown that financial variables have important impact on economic growth.
However, recently the emphasis increasingly shifted to stock market indicators
due to the increasing role of financial markets in different economies.
For example, Atje and Jovanovic
(1993) tested the hypothesis that the stock markets have a positive impact on
growth performance. They find significant correlations between economic growth
and the value of stock market trading divided by GDP for 40 countries over the
period 1980-88 similarly, Levine and Zervos (1996, 1998) and Singh (1997) show
that stock market development is positively and robustly associated with
long-run economic growth.
In addition, using cross-country
data for 47 countries from 1976-93, Levine and Zervos (1998) find that stock
market liquidity is positively and significantly correlated with current and
future rates of economic growth, even after controlling for economic and
political factors. They also find that measures of both stock market liquidity
and banking development significantly predict future rates of growth. They,
therefore, conclude that stock markets provide important but different
financial services from banks.
Furthermore, using data from 44
industrial and developing countries from 1976 to 1993, Demirguc-Kunt and Levine
(1996a) investigate the relationships between stock market development and
financial intermediary development. They find that countries with
better-developed stock markets also have better-developed financial
intermediaries. Thus, they conclude that stock market development goes
hand-in-hand with financial intermediary development.
Existing
models suggest that stock market development is a multifaceted concept,
involving issues of market size, liquidity, volatility, concentration,
integration with world capital markets, and institutional development. Using
data on 44 developed and emerging markets from 1976 to 1993, Demirguc-Kunt and
Levine (1996a) find that large stock markets are more liquid, less volatile,
and more internationally integrated than smaller markets. Furthermore,
institutionally developed markets with strong information disclosure laws,
international accounting standards, and unrestricted capital flows are larger
with more liquid markets.
Theory also points out a rich
array of channels through which the stock markets such as market size,
liquidity, integration with world capital markets, and volatility may be linked
to economic growth. For example, Pagano (1993) shows the increased risk-sharing
benefits from larger stock market size through market externalities, while
Levine (1991) and Bencivenga, Smith, and Starr (1996) show that stock markets
may affect economic activity through the creation of liquidity. Similarly,
Devereux and Smith (1994) and Obstfeld (1994) show that risk diversification
through internationally integrated stock markets is another vehicle through
which the stock markets can affect economic growth.
Besides stock market size,
liquidity, and integration with world capital markets, theorists have examined
stock return volatility. For example DeLong et al (1989) argues that
excess volatility in the stock market can hinder investment, and therefore
growth. Thus, though, it is now well recognized that financial development is
crucial for economic growth, however, the relationship can go the other
direction. In other words, economic growth can also promote financial
development. Recent literature on growth deals with this causal relationship
along three lines: financial deepening stimulates economic growth; economic
growth promotes the development of the financial sector; and a circular
relationship that financial development and economic growth simultaneously
affect each other (see Garcia and Liu, 1999).
From the above therefore, the
school of thought that says financial development causes economic growth argue
that financial development has a causal influence on economic growth. That is,
deliberate creation of financial institutions and markets increases the supply
of financial services. The financial sector increases savings, and allocates
them to more productive investments, thereby financial development can
stimulate economic growth (see, McKinnon, 1973; Shaw, 1973; King and Levine
(1993).....
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