THE IMPACT OF STOCK MARKET PERFORMANCE ON   THE GROWTH OF NIGERIAN ECONOMY

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                                          ABSTRACT

This study is motivated primarily by the need to enhance capital accumulation from the stock market, being the long term end of the financial system. This study is an investigation of the impact of Nigeria stock exchange performance on the economic growth of Nigeria. To accomplish these objectives, an econometric methodology was adopted as a tool for testing the stated hypothesis. The ordinary least square was chosen as the estimation tool because of the advantages it has over other estimation technique considering the phenomenon under study.

The result of the student – t test revealed that the coefficient for market capitalization, investment rate and real exchange rate are all statistical significant at 5 percent level of significance. But the coefficient of real interest rate were not statistically significant at 5 percent level of significance The R² which is the coefficient of multiple determination also revealed that 99 percent of the variation in the dependent variable is caused by the variation in the explanatory variables. The F test result suggested that the model is statistically significant.

Expansion and efficiency of the Nigerian Stock Market would also be realizable if the recommendations in this project are considered This study recommends that the financial sector should be fully liberalized for efficient functioning of the financial system, the activities of the Nigerian Stock Exchange should be made more transparent as this will bring bout confidence in the mind of investors and people will be encouraged to invest, and the Government should encourage Nigerians to take advantage of the Stock Market and save for investment growth and capital formation in Nigeria.

 

 CHAPTER ONE

1.1 Background of the study ………………………………………1-10

1.2 Statement of the problem………………………………………10-11

1.3 Objectives of the study…………………………………………11

1.4 Hypothesis of the study…………………………………………11

1.5 Significance of the study……………………………………….12-13

1.6 Scope and limitation of the study………………………………13

CHAPTER TWO                                    

LITERATURE REVIEW

2.1 Theoretical literature…………………………………………..14-48

2.2 Empirical literature…………………………………………….48-56

 

CHAPTER THREE

METHODOLOGY

3.1 Method of Evaluation…………………………………………..57-61

3.2 Model specification……………………………………………..61-63

3.3 Data required and source………………………………………..63

CHAPTER FOUR

PRESENTATION AND ANALYSIS OF RESULT

4.1 ADF Test for stationery………………………………………64-66

4.2 Co integration test……………………………………………..66-67

4.3 Presentation of regression result………………………………67-68

4.4 Interpretation of regression results……………………………68-70

4.5 Statistical criteria……………………………………………….71-74

4.6 Economic criteria……………………………………………….74-78

4.7 Evaluation of hypothesis……………………………………….78

CHAPTER FIVE

SUMMARY, CONCLUSION AND POLICY RECOMMENDATION

5.1 Summary…………………………………………………….79-80

5.2 Conclusion………………………………………………….80-82

5.3 Policy Recommendation………………………………..….82-83

Bibliography………………………………………………….84-90

Appendix……………………………………………………..91-97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  CHAPTER ONE

1.1     BACKGROUND TO THE STUDY

Primarily, a stock market is the place where companies can raise money to make their businesses bigger and better. Companies raise money by selling shares or stocks to investors. At the same time, the stock market gives investors an opportunity to invest in these companies and benefit from any profit they can make.

A stock market can also be called a capital or securities market as it encompasses the stock exchange, the branches, and the stockbrokers. An organized securities market requires a securities exchange, a securities commission or other regulatory agency, and intermediaries such as dealers, brokers, securities analysts, etc. Virtually all costs are borne by those who benefit. The intermediaries receive their fees from the issuers or investors to whom they provide a service. The stock market is usually funded through fees paid by investors and issuers; even the expenses of the securities commission may be partially paid for by registration fees rather than being a major burden on the government budget. Companies which go public are subject to continuous cost of providing financial information, transferring shares, paying dividends, and other aspects of shareholder relations. The stock market is the aspect of the financial system which mobilizes and channels long term funds for economic growth. The stock market embraces trading in both new issues (primary) and old issues of stocks (secondary). Securities are primarily of 2 types: debt and equity. Debt securities include federal government development stock (GDS), industrial loans, preference stocks, bonds e.t.c, while equity securities mainly concern ordinary stocks which impose higher liabilities on the holders. Portfolio investment in the capital market is the acquisition of financial assets (which includes stock, bonds, deposits, and currencies) from one country in another country. It is a form of investment that attempts to achieve a mixture of income and capital growth, it deals with an institutional arrangement involving the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the operators, and the investors. Stock market is viewed as a medium to encourage saving, help channel savings into productive investment, and improve the efficiency and productivity of investment. The emphasis on the growth of stock markets for domestic 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, publicly held companies cannot afford this luxury. The availability of reliable information would help investors make comparism 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.

The capital market in any country is one of the major pillars of long term economic growth and development. The market serves a broad range of clientele including different levels of government, corporate bodies, and individuals within and outside the country. For quite some time now, the capital market has become one of the means through which foreign funds are being injected into most economies, and so the tendency towards a global economy is more feasible/ visible there than anywhere else. It is, therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring overall economic growth of a nation.

Historically, the financial sector in the developing world has been primarily bank based. But, in recent years, there has been a gradual shift to a more holistic approach which, alongside the banks, seeks to develop the securities market. Some of the strength of the securities market which makes them the focal point of the shifting emphasis is their ability to:

1. mobilize long term savings for financing long tenure investments;
2. provide risk capital (equity) to entrepreneurs;
3. encourage broader ownership of firms; and
4. Improve the efficiency of resource allocation through competitive pricing mechanisms.
5. Provision of alternative sources of finance other than taxation and foreign loan to fund public projects.

Apart from these primary benefits, a developed securities market in the sense of efficient financial intermediation further brings additional gains to the economy. These gains arise through:

1. lower cost of equity capital for firms;
2. imposition of discipline on corporate managers as share prices react to right and wrong judgment in firm’s investment decisions;
3. existence of mechanisms for appropriate pricing and hedging against risk; and
4. Increased flow of funds to the domestic economy as international capital responds to the thriving stock market.

The development of securities market could help to strengthen corporate capital structure (i.e. the composition of the capital of the firms) and efficient and competitive financial system. The stock market encourages savings by providing households with an additional instrument which may better meet their risk preferences and liquidity needs.

In well-developed capital markets, share holding provides individuals with a relatively liquid means of sharing risks in investment projects. To the extent that securities and bonds are a viable and relatively secure form of investment with an attractive long term return, they serve two functions:

1. stocks provide an incentive to save and invest; and
2. Financial savings are promoted and domestic savings rate increase as a whole.

Stock market development has an important role to play in economic development. Shahbaz and his friends (2008) argue that stock market development is an important wheel for economic growth as there is a long-run relationship between stock market development and economic growth. Stock market development has the direct impact in corporate finance and economic development. Gerald (2006) states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment by firms. It ensures that these funds are allocated to the most productive use and spreading risk and providing liquidity so that firms can operate the new capacity efficiently. A growing body of literature has affirmed the importance of financial system to economic growth. Financial markets, especially stock markets, have grown considerably in developed and developing countries over the last two decades. Claessens, et al (2004) states that several factors have aided in their growth, importantly improved macroeconomic fundamentals, such as more monetary stability and higher economic growth. General economic and specific capital markets reforms, including privatization of state-owned enterprises, financial liberalization, and an improved institutional framework for investors, have further encouraged capital markets development. Similarly Mishkin (2001) states that a well-developed financial system promotes investment by identifying and financing lucrative business opportunities, mobilizing savings, allocating resources efficiently, helping diversify risks and facilitating the exchange of goods and services. From the view point of Sharpe, et al (1999), stock market is a mechanism through which the transaction of financial assets with life span of greater than one year takes place. Financial assets may take different forms ranging from the long-term government bonds to ordinary shares of various companies. Stock market is a very important constituent of capital market where the shares of various firms are traded Trading of the shares may take place in two different forms of stock market. When the issuing firm sells its shares to the investors, the transaction is said to have taken place in the primary market but when already issued shares of firms are traded among investors the transaction is said to have taken place in the secondary market. Stock markets are very important because they play a significant role in the economy by channeling investment where it is needed and can be put to best (Liberman and Fergusson, 1998). The stock market is working as the channel through which the public savings are channelized to industrial and business enterprises. Mobilization of such resources for investment is certainly a necessary condition for economic take off, but quality of their allocation to various investment projects is an important factor for growth. This is precisely what an efficient stock market does to the economy (Berthelemy and Vardoulakis, 1996). Earlier research emphasized on the role of the banking sector in the economic growth of nation. In the past decade, the world stock markets surged, and emerging markets accounted for a large amount of this boom (Demirguc-Kunt and Levine (1996a).  Recent research has begun to focus on the linkages between the stock markets and economic development. New theoretical work shows how stock market development might boost long-run economic growth and new empirical evidence supports this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and Zervos (1998) find that stock market development is playing an important role in predicting future economic growth. In underdeveloped countries like Nigeria, the development and growth of stock markets have been widespread in recent times. Despite the size and illiquid nature of stock market, its continued existence and development could have important implications for economic activity. For instance, Pardy (1992) has noted that even in less developed countries capital markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus stock markets