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STOCK MARKET DEVELOPMENT INDICATORS AND ECONOMIC GROWTH IN NIGERIA

ABSTRACT

This study tends to examine the impact of the stock market indicators on economic growth in Nigeria. The stock market has over years been a major player in the visionary growth of the Nigerian economy. The major objective of the study was to investigate the impact of these stock market indicators towards the economic development in Nigeria while other objectives investigated each of these indicators individually on the GDP of Nigeria. The market hypothesis theory was reviewed as to set up the a-prior expectation as to the accuracy of the results of the hypotheses designed for the study. The research design adopted was the ex-post facto because the study made use of the secondary data for its method of collecting data, since its samples were drawn from all the stock market indicators theory. The model specification was design in such that the GDP was used as the dependent variable as against the value of shares traded (VST), market capitalization (MKTCAP), value of new issues (VNI) and Number of firms listed (NOLF) in the NSE. The technique of data analysis used was the Pearson’s correlation and the multi-regression model techniques (MRM). Data were sourced from the CBN, SEC and statistical bulletins. Four hypotheses were tested and the student t-test was used in testing these hypotheses and it was found out that three of the hypotheses had their null hypotheses rejected thereby accepting their alternative hypotheses while one hypothesis had its null hypothesis accepted. It concluded that the variable in the model specified in this study was significant and its coefficient determination was more than average explaining that the variables were sufficient for the study. Therefore, the study recommends that there is need for improvement in the declining market capitalization and promotions of more firms in participating in the NSE


CHAPTER ONE

1.0                                     INTRODUCTION

1.1     OVERVIEW OF THE STUDY

The stock market is a network of financial institutions and infrastructure that interact to mobilize and allocate long-term funds in the economy. The market affords business firms and governments the opportunity to sell stocks and bonds, to raise long-term funds from the savings of other economic agents. The stock market is a highly specialized and part of organized financial market and indeed an essential agent of economic growth because of its ability to facilitate and mobilize saving and investment. Iyola, [2004] identified that sourcing of long-term finance through the capital market is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth. The capital market effectively started operations in Nigeria on 5th June, 1961 under the provision of the Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock Exchange in December 1977 as a result of the review of the Nigerian financial system [CBN, 2007]. The Securities and Exchange Commission [SEC] was established in 1979 through the SEC Act 1979, to regulate the capital market, but it commenced actual operation in 1980. It took over regulatory functions from Capital Issues Commission, which was established in 1973. Since then, various forms of financial instruments have been issued in the capital market by new and existing business to finance product development, new projects or general business expansion. The capital market, no doubt, is pivotal to the level of growth and development of the economy. Chinwuba and Amos [2011] note that capital market is one of the major institutions that acts in propelling a prostrate economy for growth and development. Nyong, [1997] sees it as a complex institution imbued with inherent Mechanism through which long-term funds of the surplus sectors of the economy are mobilized, harnessed and made available to deficit sectors of the economy.

Osaze and Anao, [1999], assert that capital market is the cornerstone of any financial system since it provides the funds needed for financing, not only business and other economic institutions, but also the programs of government as a whole. Ilaboya and Ibrahim, [2004], stress that capital market functions as an economic barometer for galvanizing economic activities. The journey to the present democratic experience in Nigeria commenced on May 29, 1999, when the military government returned power to civilian administration. The agitation for the exit of the military was embarked upon because of the popular belief among the stakeholders in the economy that, democracy, among other things, promotes economic growth. North, [1990], also argue that the motivation of citizens to work and invest, the effective allocation of resources in the market place, and profit-maximizing private activity can all be maintained in a climate of liberty, free-flowing information and secured control of property. The importance of the capital market as an efficient channel of financial intermediation has been well recognized by the researchers, academicians, and policy makers as a primary determinant of the economic growth of a country, both developed and developing. Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments.

The stock market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. According to Alile, [1984], it is made possible through some of the vital roles played such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to the surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. Alile, [1997] said it helps to channel capital or long-term resources to firms with relatively high and increasing productivity thus enhancing economic expansion and growth. Ekundayo, [2002] argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. The stock market provides a means through which this is made possible. However, the paucity of long-term capital has posed the greatest predicament to economic development in most African countries including Nigeria. Osaze [2000] sees the capital market as the driver of any economy to growth and development because it is essential for the long term growth capital formation. It is crucial in the mobilization of savings and channeling of such savings to profitable self-liquidating investment. The Nigerian capital market provides the necessary lubricant that keeps turning the wheel of the economy. It not only provides the funds required for investment but also efficiently allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy. Anyanwu, [1998] identified that the functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control. Therefore by, Equakun, [2005], altering the quality of these services, the functioning of stock markets can alter the rate of economic growth.

According to Okereke-Onyiuke, [2000], who posits that the cheap source of funds from the capital market remains a critical element in the sustainable development of the economy? She enumerated the advantages of capital market financing to include no short repayment period as funds are held for medium and long term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans. In 1986 Nigeria embraced the International Monetary Fund [IMF]-World Bank Structural, Adjustment Programme [SAP] which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s. Yesufu, [1996] said the programme was proposed as an economic package to rapidly and effectively transform the Nigerian economy within two years. However, according to Oyefusi and Mogbolu, [2003] until SAP was abandoned in 1994, the objectives were not achieved due to the inability of government to judiciously implement some of its policy measures. The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%, interest deregulation from August 1987, financial market reform and public sector reforms which entails the full or partial privatization and commercialization of about 111 public owned enterprises. World Bank [1994]; Anyanwu [1993]; Anyanwu, [1997]; Oyefusi and Mogbolu, [2003] identified The Nigerian Stock Exchange [NSE] a key role player during the offer for sale of the shares of the affected enterprises. Alile, [1996] and Soyode, [1990] saw that the introduction of SAP in Nigeria has resulted in a very significant growth of the country’s stock market as a result of deregulation of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market. Ariyo and Adelegan [2005] contend that the liberalization of capital market led to the growth of the Nigerian capital market yet its impact at the macro-economy was negligible. Again the capital market was instrumental to the initial 25 banks that were able to meet the minimum capital requirement of N25billion during the banking sector consolidation in 2005. Nwankwo, [1991] contended that the stock market has helped government and corporate entities to raise long-term capital for financing new projects ,and expanding and modernizing industrial /commercial concerns.

1.2     STATEMENT OF THE PROBLEM

         Olawoye, [2011] in his study developed a model using a multiple regression approach line in experimenting the bi-directional relationship among four variables which were Gross Domestic Product Growth Rate [GDPGR], Total Market Capitalization [TMC], All Share Index [ASI] and Total Value of Stock [TVS] as the dependent and independent variables respectively in the “impact of capital market on economic growth of Nigeria”. Ewah, Essang and Bassey [2009] also adopted the same variables in their empirical study in the “Appraisal of Capital Market Efficiency and Economic Growth in Nigeria”.  These variables were also adopted in a recent study done by Echekoba, Ezu and Egbunike [2013] in the “Impact of Capital Market on the Growth of the Nigerian economy under Democratic Rule”. The heterogeneity in these empirical studies was trend analysis data and empirical result.

Kolapo and Adaramola [2012], used GDP as the dependent variables as against Market Capitalization [MCAP], Total New Issues [TNI], Total Value for Transaction [TVT] and Total Listed Equities and Government Stock [LEGS] which were the independent variables, their studies showed that all their tested variables conformed to the a-priori expectation except the Total Listed Equities and Government Stock [LEGS] which had a negative impact to the dependent variable. Though the studies of Ariyo and Adelegan [2005] and Ewah et al [2009] found out that the capital market in Nigeria had potentials to induce growth but do not contribute significantly to the economic growth of Nigeria due to low market capitalization, small market size, few listed companies, low volume of transactions and illiquidity among others which could be traced back as inadequacy of information being gathered for necessity of the research. Edame and Okoro [2013] posited a dependent variable in his study as GDP while Market Capitalization [MAKAP], Number of Deals [NDEALS], Value of Transaction [VTRAN] and interest rate [INT] were the independent variables and also collating a 40 years [1970-2010] time series data. A conceptual reproach was observed by two Indian authors Vyapak and Ani [2011] as they explained how Initial Public Offer [IPO], Regulatory Bodies, Corruptions and Scams have been the blood hound to the Indian Capital Market. There were neither empirical approaches to show how these issues could be measured or represented by variables nor no specific model identification in expressing these problems as they affect the capital market and the Indian economy. Also, Richa and Deepti [2014] studied the Indian capital market as an overview performance without any empirical findings to evaluate the effectiveness and efficiency of their studies as contribution towards the Indian economy.

Tentatively, clinical observation had being processed in accessing previous articles, journals and empirical studies to evaluate the manner and approaches employed by authors used in carrying out their studies. It is of my opinion that about 74.5% of the numerous studies accessed had an empirical finding of which less than 56.5% conducted a multiple regression analysis and their result conforming to the a-priori expectation of the theories guiding the capital market performance and its impact on the Nigerian economy in this scope of study. About 15.5% of these studies didn’t used measurable variables in accessing the significant impact or relationship between the independent and dependent variables, more also, those studies decided to study the capital market effectiveness towards the whole economy which seems to be on a larger scope for an empirical study. The balance of 10% of authors’ studies did not emphasize on empirical findings to investigate deeply on the impact of the capital market to the performance of the economy as the case may be.

In an attempt to bridge the gap among these heterogeneous parameter, time series data will be employed by the researcher to avoid any discrepancy that might occur in future references in this field of study. Therefore, the researcher has decided to employ six variables to specify a suitable model that will access most capital market indicators in determining the growth in the manufacturing sector which stands as a subsector in the Nigerian economy. Thereby, the researcher intends in bridging the lapses of enormous and ambiguous scope of study by other authors in their studies.  This study will therefore investigate the impact of the capital market performance in the manufacturing sector in Nigeria 

1.3 OBJECTIVES OF THE STUDY

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