Impact of Capital Market Performance on Economic Growth in Nigeria
CHAPTER ONE
Objectives of the study
The main objective of the study is to examine the impact of capital market performance on economic growth in Nigeria. However the specific objectives are to:
- Determine the impact of market capitalization on the Gross Domestic Product (GDP).
- Assess the effect of total new issues on the gross domestic product.
- Identify the contribution of the volume of transaction to the gross domestic product in Nigeria.
- Examine the impact of total listed equities stocks on the gross domestic product in Nigeria.
CHAPTER TWO
LITERATURE REVIEW
Introduction
This chapter reviews relevant literatures; issues reviewed include capital market variables like market capitalization, new issues, volume of transaction and equity stocks as well as gross domestic product (GDP). Furthermore, it also reviews previous studies on capital market performance and economic growth by various scholars, roles of the capital market in Nigeria, contribution of the capital market to the economic growth of Nigeria and finally provides an analysis of the Nigerian capital market performance.
Concept of capital market variables
Capital market is an integral part of the financial system that provides an efficient delivery mechanism for mobilization and allocation, management and distribution of long term funds for investment project (Alile & Anao, 1990).
Sule and Momoh (2009) notes that the capital market is the medium through which funds are mobilized and channeled efficiently from savers to users of funds. Apart from judicious mobilization of idle savings into productive use, the capital market creates an avenue for foreign investment and the influx of foreign capital for developing projects that will increase the welfare of citizens.
A capital market is a market for securities (debtor equity), where business enterprises (companies) and government can raise long-term funds (Sullivan & Sheffrin, 2003). It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place at other market, which in this case is the money market. The capital market includes the stock market such as equity securities and the bond market which is about debt. The financial regulators of the capital market such as the Central Bank of Nigeria, Securities and Exchange Commission (SEC) oversee the capital markets in their designated jurisdiction to ensure that investors are protected against fraud (Afolabi, 1991).
Thus, the capital market is one in which individuals and institutions trade financial securities. Also, organizations or institutions in the public and private sectors also often sell securities on the capital market in order to raise funds.
Thus, this type of market is composed of both the primary and secondary market (Olowe, 1997). The Capital market has also been defined as the market where medium or long-term finance can be raised (Akingohungbe, 1996). Ekezie (2002) notes that the capital market is the market for dealings in terms of Lending and borrowing in long-term loan able funds. Mbat (2001) describes it as a forum through which long-term funds are made available by the surplus economic unit to the deficit economic units. It must, however, be noted that although all the surplus economic units have access to the capital market, not all the deficit economic units have the same easy access to it. The restriction on the part of the borrowers is meant to enforce the security of the funds provided by the lenders. In order to ensure that lenders are not subjected to undue risks, borrowers in the capital market need to satisfy certain basic requirements such as the capital base of the organization, financial worthiness and a host of others.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter describes the research method adopted in conducting the research. It presents logical information on procedure for the collection of data, techniques of data analysis, variable measurement and justification of method and technique.
Research Design
Descriptive research design has been adopted for the purposes of this study. According to Best and Kahn (1989), descriptive research is the type of enquiring that deals with the collection and analysis of data for the purposes of describing and interpreting existing conditions and also to make discovery and explanation of past events. Descriptive research is utilized because it enables exploring relationships between two or more variables. Also, it is appropriate for testing the hypotheses of the study and help to answer the research questions concerning the capital market and the economy which are crucial concern of this study.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
Introduction
The chapter deals with the presentation and analysis of the data collected. To test the hypotheses of this study, a multiple regression model is used. This is deemed as suitable due to the nature of the variables which are continuous rather than dichotomous categorical variables. Finally, the findings and policy implication of the result are discussed. The table that follows contains the data extracted from the Nigerian Stock Exchange bulletin and the Central Bank of Nigeria (CBN) statistical bulletin which was used in running the regression and obtaining the results of the study.
Multiple regression has been used to estimate the relation between the independent variables of capital market performance (market capitalization, total new issues, volume of transaction and listed equities) and the dependent variable (Gross Domestic Product). The technique of ordinary least square was used to estimate the regression coefficient in the model of the study.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Summary
This study has developed a prudent multiple regression model for the purpose of explaining and analysing empirically, the impact of capital market performance on economic growth in Nigeria. Using multiple regression analyses to model development, the study estimates the relationship between four explanatory variables; market capitalization, total new issues, volume of transaction and listed equities and one explained variable, Gross Domestic Product, by means of the ordinary least square technique.
The study hypothesized a significant impact between the four explanatory variables and the Gross Domestic Product and the findings of the research are based on the time series data collected for the period 1983 – 2010 from the NSE, SEC and CBN. The result of the study reveals that the four predictor variables market capitalizations, total new issues, volume of transaction have an aggregate significant impact at I per cent level of significance and listed equities is at 5 per cent level of significance on the GDP.
The foregoing provided the justification for the rejection of all the null hypothesis of the study. The study also reveals that market capitalization, has the highest impact on the GDP followed by total new issues and then the volume of transaction and finally listed equities.
Conclusion
Based on the findings of the research, the study concludes as follows:
First, the study has provided evidence on the four independent variables; market capitalization, total new issues, volume of transaction and listed equities in explaining and predicting economic growth in Nigeria. The study concluded that the four variables have played a significant role in influencing the capital market performance on Nigeria’s economic growth.
Secondly, the study also establishes significant positive relationship between total new issues and economic growth. It is therefore concluded that as new issues are raised and floated in the market, this in turn increases the number
of shares traded and economic growth equally expands as well as impacting on the GDP.
Thirdly, the study documents a significant positive relationship between volume of transaction and the gross domestic product. This concludes that the volume of transaction is an important factor in determining the magnitude of trading of shares in the capital market and it goes a long way in improving the performance of the market and as well increases the efficiency of the market which invariably improves the economic growth of Nigeria.
Among the predictable variables market capitalization contributes highest to economic growth. In respect of volume of transaction the study concluded as having the lowest contribution to the aggregate impact of capital market performance on economic growth in Nigeria.
In addition, in respect of listed equity, the study concludes that listed equity of Nigerian capital influences the performance of the market and improves economic growth.
Finally, the study concludes that there is a complete absence of serial correction between market capitalization, total new issues, volume of transaction and listed equities as proxies of capital market performance.
Also the correlation matrix reveals that, market capitalization has the highest relationship with economic growth which signifies more contribution of capital market performance to Nigeria’s economic growth.
Recommendations
Based on the findings and conclusions of the study, the following recommendations are hereby presented:
- Firstly, there is need for improvement in the declining market capitalization by encouraging more foreign investors to participate in the market, maintain state of the art technology that will ensure a free flow of information in the market to attract more investors as well as increase new issues which will automatically increase the quantum of market capitalization. There is also the need to restore confidence in the market by the Securities and Exchange Commission and the Nigerian Stock Exchange through ensuring transparent and fair trading transactions and dealings in the stock exchange. Government should remove impediments to market growth in form of legal and regulatory barriers because they are sometimes disincentives to investment.
- Secondly, as observed the total listed equities in the NSE are still very low compared to other stock markets like those of South Africa and Egypt. Therefore, to increase the number of listed companies there is need to ensure stable macroeconomic environment, to encourage foreign multinational companies or their subsidiaries to be listed on the Nigerian stock exchange and also to improve the trading system in order to increase the ease with which investors can purchase and sell shares.
- Furthermore, the government should invest more and develop the nation’s infrastructure in order to create an enabling environment for businesses to grow and for productivity and efficiency to thrive which will bust economic activities.
- Thirdly, total new issues are very important to the growth of any capital market. Therefore, government should employ appropriate trade policies such as establishing National Association of Securities Dealers (NASD) that promote the inflow of international capital and foreign investment, so as to enhance the production capacity of the nation. The Government should restore the confidence of shareholders (investors) due to the declining fortune of the stock market.
- Finally, the volume of transaction needs to be boosted by NSE through introducing more derivatives, convertibles, futures and options in the markets in order to meet up with other markets of the world.
Limitations of the Study
The study covers a period of 1991 – 2018. This therefore serves as one of the limitations of the study. Secondly, the study is limited to only the Nigerian Stock Market. It could have covered other countries in the Sub- Saharan region by widening its scope.
Finally, several variables are used as proxies of capital market performance. This study therefore, uses only four variables to measure capital market performance, more variables may be useful to improve the results.
Bibliography
- Abdullahi, S.A (2005) Capital Market Performance and Economic Development in Nigeria. A paper presented at the department of Business Administration, Bayero University
- Abu N (2009) “Does Stock Market Development Raise Economic Growth? Evidence from Nigeria”. Journal of Banking and finance 1 (1), 15-26
- Adamu, J.A Sanni. I (2005) “Stock Market Development and Nigerian Economy Growth”.
- Journal of Economic and Allied Field 2(2), 116-132.
- Adam, J. A., & Sanni, I. (2005). Stock Market Development and Nigeria’s Economic Growth. Journal of Economics and Allied Fields, Vol. 2 No. 2, pp. 116-132.
- Adamu,A.(2008).The Effect of Global Financial Crisis on Nigerian Economy.http://www.rrojasdatabank.info/crisisdb/onnigeria,retrieved on 28/05/2011 at about 18:00hrs.
- Adebiyi, M.A. (2005). Capital Market Performance and The Nigerian Economic Growth. In Oluwatayo O.F. and Olasupo, A; Issues in Money, Finance and Economic Management in Nigeria. Lagos: University of Lagos Press.
- Adewoyin, K.O. (2004). The Nigerian Financial System: Money and Capital Market. Osun : New deal Publication Limited.
- Afolabi, L. (1991). Monetary Economics. Lagos: Heinemann Educational Books Nigeria Plc.
- Agarwal S. (2001). Stock Market Development and Economic Growth: Preliminary Evidence from African Countries. Retrieved, April, 2, 2012 from http://www.jsd%20Stock%ARC%2020Market%20Development%20and% 20Economic%20Growth.pdf
- Akingbohungbe, S. S. (1996).The Role of the Financial System in the Development of the Nigerian Economy. Paper Presented at a Workshop Organized by Centre for Africa Law and Development Studies.
- Al-Faki, M. (2006). The Nigerian Capital Market and Socioeconomic Development. Paper presented at the 4th Distinguished Faculty of Social Science Public Lecture,University of Benin, 26 July, pp. 9-16 .
- Alile, H.I & Anao, R.A. (1990 ). The Nigerian Stock Exchange in Operation.
- Lagos: Academy Press.
- Anyanwu, J.C. (1996). Monetary Economics: Theory, Policy and Institutions.
- Lagos: Hybrid Publishers Limited.
- Anyanwu, J.C. (1998). Stock Market Development and Nigerian Economic Growth, Nigerian Financial Review, 7(2) 6-13.
- Atje, R. & Jovanovic, B. (1993). Stock Markets and Development. European Economic Review.
