Abstract
This study examined the impact of the Nigerian Stock market development on the nation’s economic growth from 2015 to 2020. The economic growth was proxy by the GDP while the stock market variables considered included; market capitalization and market turnover ratio as proxy for stock market development in terms of size and liquidity. The study utilizes the Johansson’s co integration test in establishing if a long run relationship does exist between stock market development and economic growth in Nigeria. The empirical results suggest that the stock market is significant in determining economic growth in Nigeria using the error correlation model and it was found that the stock market has impacted insignificantly on the economic growth. It is recommended that policy makers should ensure improvement in the market capitalization, by encouraging foreign direct investment participation in the market. Small and medium entrepreneurs should be encouraged to access the market for investible funds given their close affinity with the grass root funds mobilization ability.
CHAPTER ONE
INTRODUCTION
1.1 Background of Study
The Nigerian Stock Exchange was established in 1960 as the Lagos Stock Exchange.
In 1977 it became The Nigerian Stock Exchange, with branches established in some of the major commercial cities of the country with Lagos as the head office of the Nigerian Exchange and an office in Abuja. The Exchange started operations in 1961 with 19 securities listed for trading. Today there are 262 securities listed on The Exchange, made up of 11 Government Stocks, 49 Industrial Loan (Debenture/Preference) Stocks and 194 Equity / Ordinary Shares of Companies, all with a total market capitalization of approximately N287.0 billion, as at August 31, 1999. Presently, there are 139 listed equities while the all-share index and market capitalisation stood at 24,807 basis points and 1.973 trillion respectively as at December 3, 2010. (Nigerian Stock Exchange Equities Summary. Most of the listed companies have foreign/multinational affiliations and represent a cross-section the economy, ranging from agriculture through manufacturing to services.
It is obvious that the stock market plays a very critical role in economic growth and development of any nation. Therefore, the development of stock market is regarded as key and important vehicle in accelerating the growth of economy. Over the years, Nigeria stock market experienced phenomenon growth from year 2015 with market capitalization of paltry N6.6 billion to an average of N13 trillion in 2020.
The enormous benefits which the stock market possessed have made it an interesting topic for so many authors, economists and policy makers. The fact that Nigeria has been enjoying tremendous inflow of foreign direct investment in its stock market cannot be ignored. This has greatly impacted the development of the market especially in the period preceding global recession of year 2008. Stock market is regarded as a guide to business and was argued that an active capital market is a reliable platform to measure general economic activities with the use of market index (Obadan, 1998).
The main essence of the stock market is to consolidate growth in the financial systems, and enhance the consequent impact of the latter on economic development. According to Yartey and Adjasi (2007), the establishment of stock markets in Africa is expected to boost domestic savings and increase the quantity and quality of investments. Singh (1997) emphasized that in principle, the stock market is expected to accelerate economic growth by providing a boost to domestic savings thereby increasing the quantity and the quality of investment.
Equally, stock exchange can increase economic growth by making available information on firms‟ prospects and redistributing investible capital. Supporting this view, in the case of Africa, Yartey and Adjasi (2007) establish that the stock markets have contributed to the financing of the growth of large corporations in certain African countries and that large corporations in Africa have made considerable use of the stock markets to finance their growth.
In the case of Africa, however, little proofs are available to support arising theoretical projections on the role of the stock market in encouraging capital formation and investments. This situation has instead helped to tilt public opinion towards believing the allegation that emerging African economies have not felt the impact of the huge growth recorded by the stock markets over the years.
According to Levine (1991) liquid equity market makes investment less risky and more attractive because they allow savers to sell their equity quickly and cheaply if they need access to their savings. In other words investors will have confidence in markets that are assessable whenever the need arises. The more accessible the participants are to the market, the more liquid the market will become.
The market has in place a tested network of Stockbrokerage Firms, Issuing Houses (Merchant Banks), practicing corporate law firms and over 50 quality firms of auditors and reporting accountants (most with international links). The Stock Exchange and most of the nation’s stock broking firms and issuing houses are staffed with creative financial engineers that can compete anywhere in the World. Therefore, the market has in place a network of intermediating organizations that can effectively and creditably meet the challenges and growing needs of investors in Nigerian. Integrity is the watchword of The Stock Exchange. Market operators subscribe to the code “Our word is our bond”. Thus, public trust in the Nigerian stock market has grown tremendously, with about three million individual investors and hundreds of institutional investors (including foreigners who own about 47% of the quoted companies) using the facilities of The Exchange. However, the aftermath of the global financial meltdown has greatly affected the confidence level of investors. In the interim, the stakeholders are making frantic efforts to return the Exchange to an enviable position.
The call over trading system was in April replaced with the Automated Trading System (ATS), with bids and offers now matched by stockbrokers on the Trading Floors of The Stock Exchange through a network of computers. This is done every business day from 11.00 a.m. till all bids and offers have been executed (about 1.30 p.m. on the average). This time period has been extended by 2 hours recently as a strategic approach to enhanced efficiency in the market. Prices of new issues are determined by issuing houses/stockbrokers; while on the secondary market prices are made by stockbrokers only. The market/quote prices, along with the AllShare Index, are published daily in The Stock Exchange Daily Official List, The Nigerian Stock Exchange CAPNET (an intranet facility), The Nigerian Stock Exchange website; Newspapers and on the stock market page of the Reuters Electronic Contributor System.
Dermirguc-kunt and Levine (1995) further expounded that large companies enjoy permanent access to capital raised through issues. That is to say that, through facilitating long term and profitable investment, liquid market improves the allocation of capital and enhances the prospect of long economic growth. Stock markets play key role in allocating capital to corporate sector, which in turn exerts real effect on the domestic growth of the economy, (Caporale, G. M., Howells, P., and Soliman. A. M. 2005). Empirical investigation on the link between financial development in general and stock market in particular have been relatively limited, particularly, regarding developing economies. Substantial economic literature dating back to Bernanke and Gertler (1990) and Schumpeter (1911) had emphasis positive contribution of the financial system to economic growth.
1.2 Statement of Problem
Previous studies have examined the relationship between stock market development and economic growth. While some studies revealed negative association between stock market and economic growth, others showed a positive connection between stock market development and economic growth.
Levine and Zervos (1996), as well as Harris (1997) studies reveal positive relationship between stock market and economic growth. On the other hand, study by Osinubi and Amaghionyeodiwe (2003), using Nigerian data, affirm that stock market development statistically had no significant impact on economic growth in Nigeria during the period 1980 to 2000. According to the study, the Nigerian Stock Market was unable to make significant contribution to rapid economic growth because of the existence of certain policies that distort the effectiveness of the channel through which stock market activities influence economic growth. Demirguc-Kunt and Levine (1996) also questioned the contribution of stock market liquidity to long-term economic growth.
The current realities existing in most of the Exchanges in Africa today leave some significant gap in the debate on the impact of stock market development on economic growth. In the case of Nigeria, for instance, the market indicators have declined very rapidly as a result of the global recession that affected the financial system of Nigeria. The activities of investors engaging in capital flight and profit taking on the stock market could impact on the economy overtime with instability of the market.
The study of Nigeria stock exchange market is justifiable based on the fluctuating market capitalization and movements in the key market indicators such as value of traded securities, as well as the All-share Index. With this scenario, there is a need to establish its empirical connection with economy growth. Therefore, the objective of this study is to determine the effect of stock market development on economic growth in Nigeria.
The market in Nigeria has been described as being shallow; this is due mainly to the market float that is very small and is measured by the ratio of securities in the market to the total listed securities outstanding. The challenge that lies ahead is to be able to increase and retain as many of our domestic individual and institutional investors as possible and simultaneously attract foreign ones to the Nigerian Capital Market. This can be achieved by being dynamic, innovative, and having an open mind so that new ideas can be absorbed and put productively in use. The market mist be in a position to provide a spectrum of investment alternatives, new trading instruments with which investors can hedge their risk, as well as an environment which is honest, has sufficient structures and where policies are flexible enough to accommodate different investment needs.
The Capital market has also been characterized by a number of market failures, one of which is asymmetric information, a situation in which one party to a transaction has less information than the other party. The pervasiveness of this phenomenon greatly undermines the efficiency of financial markets as mechanisms for allocating resources. Because geography and cultural distance complicate the acquisition information, asymmetric information is particularly prevalent internationally. While the revolution in information asymmetric are lessened but not eliminated, therefore they are prone to the sharp investor reactions, unpredictable market movements and financial crisis that can occur when information is incomplete and financial markets behave erratically (Eichengreen and Musa 1998). Thus, in the absence of complete information, investors tend to rush in and out of the markets on rumour.
1.3 Purpose of the study
The purpose of the study is to critically examine and evaluate the impact of the Capital Market on the Nigerian economy efforts would be made to identify and appraise the strengths and weaknesses of the capital Market and attempts made to remedy such. This would be examined from the past, present and forecast into the future.
1.4 Objectives of study
The main objective of this work is to examine the impact of the capital market on the Nigerian economy.
The specific objectives are to assess the role of capital market in economic development and to ascertain the success achieved through a viable working model for the Nigerian economy,
1.5 Research Questions
1. What is the impact of the Capital Market and the Stock Exchange on the Nigerian Economy?
2. What is the proposed working model for the Nigerian Economy?
3. What is the relationship between the Capital Market and the Stock Exchange?
4. Does the performance of the Stock market affect the Nigerian Economy?
5. Why has the capital market been unable to mobilize domestic and foreign funds?
6. Does the Capital Market and Stock Exchange influence the Nigerian Economy?
7. What measures should be taken in order to improve the Nigerian Capital Market in particular and the Nigerian Economy in general?
1.6 Research Hypothesis
This study intends to assess the impact of the Nigerian Stock Exchange on the Nigerian economy. In the light of this, the following hypotheses will be of relevance.
H01: The market capitalization of the Nigerian Stock Exchange does not contribute to the growth of the financial system and the development of the Nigerian Economy.
H02: There is no significant relationship between Capital Market and economic development in Nigeria.
1.7 Significance of study
The significance of the study is to analyze critically the financial intermediation role of the capital market in the economy. This is evident in directing idle funds from the surplus economic units to the deficit economic units of the economy. This is expected to lead to sustainable and more socially equitable economic growth and development in the country. The Capital Market with Securities and Exchange Commission as the regulatory body executes out this function through the Nigerian Stock Exchange. This study will enable us to identify challenges prevalent in the Nigerian capital market as it relates to the economy. The need to identify catalyst in the system to jumpstart the economy is of paramount importance. This study would eventually aid in presenting a working model, for the Nigerian Capital Market in relation to the development of the economy. By extension, this work should be able to would pave the way for an improved economy if properly implemented.
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Item Type: Project Material | Size: 46 pages | Chapters: 1-5
Format: MS Word | Delivery: Within 30Mins.
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