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THE ROLE OF STOCK MARKET IN THE GROWTH OF NIGERIAN ECONOMY
(1980-2010)
ABSTRACT
This study attempts to investigate the Role of the Stock
Market in the Growth of the Nigerian Economy spanning through 1980 – 2010. The
broad objective of this work is to ascertain the role of the stock market in
output growth in Nigeria using Market Capitalization as a proxy for the stock
market taking cognizance of some intervening variables. This was evaluated
using OLS Method. It was observed that market capitalization has a significant
impact on economic growth as well as the latter Granger Causing the former.
There are also other variables that are modeled alongside market capitalization
that affect the output of Nigeria. The policy recommendation in this work
centres on deliberate attempts by the government and every agent responsible
for the existence of the market either as a player or an umpire to be up and
doing especially the government. The work is organized into five chapters, time
series data were used with three regressors: market capitalization, domestic
savings and value of traded stocks.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Stock Market is viewed as a medium to encourage savings, help
channel savings into productive investment, and improve the efficient and
productivity of investment. The emphasis on the growth of stock markets for
domestics‘ resource mobilization has also been strengthened by the need to
attract foreign capital in non-debt creating forms. A viable equity market can
serve to make the financial system more competitive and efficient. Without
equity markets, companies have to rely on internal finance through retained
earnings. Large and well established enterprises are in a privileged position
because they can make investment from retained earnings and bank borrowings,
while new companies do not have easy access to finance. Without being subjected
to the scrutiny of the stock market, big firms get bigger, and for the emerging
smaller companies, retained earnings and fresh cash injections
from the controlling shareholders may not be able to keep
pace with the needs for more equity financing which only an organized market
place could provide. The corporate sector would also be strengthened by the
requirements of equity markets for the development of widely acceptable
accounting standards, disclosure of regular, adequate, and reliable
information. While closely held companies can camouflage poor investment
decisions and low profitability, at least for a while, public held companies
cannot afford this luxury. The availability of reliable information would help
investors make compares‘ of the performance and long term prospects of
companies; corporations to make better investment and strategic decisions; and
provide better statistics for economic policy makers.
Success in capital accumulation and mobilization for
development varies among nations, but it is largely dependent on domestic
savings and inflows of foreign capital. Therefore, to arrest the menace of the
current economic downturn, effort must be geared towards effective resource
mobilization. It is in realization of this that consideration is given to
measure the development of capital market as an institution for the
mobilization of finance from the surplus sectors to the deficit sectors. Levine
(1991) showed a positive relation between financial stock market and economic
growth by issuing new financial resources to the firms. The financial stock
market facilitates higher investments and the allocation of capital, and
indirectly the economic growth. Sometimes investors avoid investing directly to
the companies because they cannot easily withdraw their money whenever they
want. But through the financial stock market, they can buy and sell stocks
quickly with more independence. An efficient stock market contributes to
attract more investment by financing productive projects that lead to economic
growth, mobilize domestic savings, allocate capital efficiently, reduce risk by
diversifying, and facilitate exchange of goods and services (Mishkin 2001; and
Caporale et al, 2004).
1.2 Statement of the Problem
There is abundant evidence that most Nigerian businesses lack
medium and long –term capital. The business sector has depended mainly on
short-term financing such as overdrafts to finance even long-term investment.
Based on the maturity matching concept, such financing is risky. All such firms
need to raise an appropriate mix of short- and long-term capital (Demirguc-Kunt
and Levine 1996). Most recent literatures on the Nigeria Capital Market have
recognized the tremendous performance the market has recoded in recent times.
However, the vital role of the capital market in economic growth and
development has not been empirically investigated thereby creating a research
gap in this area. This study is undertaken to examine the contribution of the
capital market in the Nigerian economic growth and development. Aside the
social and institutional factors inhibiting the process of economic development
in Nigeria, the bottleneck created by the deficiency of finance to the economy
constitutes a
major setback to its development. As a result, it is
necessary to evaluate the Nigerian capital market.
1.3 Research Questions
In the light of the research problems, this study attempts to
answer the following:
1. Does stock market have a significant effect on economic
growth?
2. Does investment have a significant effect on GDP?
3. What is the causality between stock market and economic
growth?
1.4 Objectives of the Study
The broad objective of this study is to examine the role that
the stock market plays in the growth process of the Nigerian economy.
However, the specific objectives are as follow:
1. To determine the nature of relationship between stock
market and economic growth.
2. To examine the determinants of investment in the stock
market.
3. To determine the causality between stock market and
economic growth.
1.5 Hypotheses of the Study
1. Ho: That the capital market has a negative relationship
with economic growth.
2. Ho: portfolio Investment in Nigeria is not a determinant
of economic growth.
3. Ho: There is no causal relationship between stock market
and economic growths.
1.6 Significance of the Study
The study will explore the effectiveness of capital market
instruments on Nigerian economic growth. Though the scope of study will be
limited to the capital market, it is hoped that the exploration of this market
will provide a broad view of the operations of the capital market. It will
contribute to existing literature on the subject matter by investigating
empirically the role, which the capital market plays in the economic growth and
development of the country. The main importance of this study is that it will
provide policy recommendations to policy – makers on ways to improve operations
and activities of the capital market.
1.7 Scope of the Study
The economy is a large component with lot of diverse and
sometimes complex parts; this research work will only look at a particular part
of the economy (the financial sector). This work will not cover all the facts
that make up the financial sector, but shall focus only on the capital market
and it role as it impacts on the Nigerian economic growth. The empirical
investigation of the role of the capital market on the economic growth in
Nigeria shall be restricted to the period between 1980 and 2010 a period of
thirty (30) years.
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