ABSTRACT
This core intent of this study is to determine the effect of general elections results on the performance of stock markets in emerging economies. This is necessitated by the concern on whether financial markets are significantly impacted by political environment during elections. The study focused on three general elections in Nigeria; 2007, 2011 and 2015 general elections. The event study methodology was adopted and analysed secondary data collected from the Nigerian stock exchange for the periods of the 2007, 2011 and 2015 general election dates. The analysis of the cumulative abnormal returns (CAR) found that the 2007 and 2011 general elections were negatively significant which we suggest can be explained by the increase in market uncertainty due to the political uncertainty while the CAR for 2015 general election was found to be insignificant at 5% level of significance. Therefore, the research study concludes that general elections have significant impact on the performance of the stock market. The study recommends that stock market regulators should carefully study political events in the implementation of policies so as to protect the stock market against political risk during general elections and to boost investor confidence in the market. Also, investors should study the market in event of political elections so as to properly understand the market and ensure that their investment in the market yields a positive return.
TABLE OF CONTENTS
Title Page i
Declaration ii
Certification iii
Dedication iv
Acknowledgements v
Table of Contents vi
List of Tables x
List of Figures xi
Abstract xii
CHAPTER 1: INTRODUCTION
1.1 Background
Information 1
1.2 Statement
of the Problem 4
1.3 Objectives of the Study 6
1.4 Research
Questions 6
1.5 Hypotheses 6
1.6 Significance
of the Study 7
1.7 Scope of the Study 8
1.8 Limitation
of the Study 8
1.9 Operational Definition of Terms 8
CHAPTER 2:
LITERATURE REVIEW
2.1 Conceptual
Framework 11
2.1.1 Electoral system 13
2.1.2 2007 Nigerian national election 14
2.1.3 2011 Nigerian national election 15
2.1.4 2015 Nigerian national election 15
2.1.5 Overview of the Nigerian stock exchange 16
2.1.6
The Growth of the Nigerian stock exchange 16
2.1.7
Development in the Nigerian stock exchange 17
2.1.8
Contribution of the stock market to capital
formation in Nigeria 18
2.1.9 Nature of investment in stocks 19
2.2 Theoretical
Review 20
2.2.1 Efficient market hypothesis 20
2.2.2 Criticism of efficient market hypothesis and
behavioural finance 22
2.2.3
Modern portfolio theory 23
2.2.4 Uncertain information hypothesis 24
2.2.5
Rational expectation theory 24
2.2.6
Political business cycle 24
2.3 Empirical Review 26
2.3.1 Pre-election period and the stock market 34
2.3.2 The Nigerian stock market and shareholders
expectation 35
2.3.3 Post-election period and the stock market 35
2.3.4 General elections and the stock market 36
2.3.5 Normal and abnormal returns 37
2.3.6. General elections and money market
performance 38
2.3.7 Transition periods and foreign investment 39
2.3.8 Effect of political election on public and
private investment 40
2.3.9 Politics and stock market volatility 41
2.3.10 Investor sentiment and the stock market 42
2.3.11 Summary of literature 43
2.3.12
Research gaps 44
CHAPTER 3: METHODOLOGY
3.1 Research Design 45
3.2 Area of Study 45
3.3 Sources and Methods of Data Collection 45
3.4 Sample Selection 46
3.5 Technique of Data Analysis 46
3.6
Models Specification 47
3.7 Description of Variables 55
CHAPTER 4: DATA PRESENTATION AND RESULTS
4.1 Introduction
56
4.2 Test of Hypothesis One 57
4.3 Test of Hypothesis Two 59
4.4 Test of Hypothesis Three 60
4.5
Test of Hypothesis Four 61
4.6. Discussion 64
CHAPTER 5: SUMMARY CONCLUSION AND RECOMMENDATIONS
5.1 Summary 67
5.2 Conclusions 68
5.3 Recommendations 69
5.4
Suggestion for Further Studies 69
5.5 Contribution to Knowledge 70
REFERENCES 71
APPENDICES 78
LIST OF TABLES
Table Page
3.1: Variables used in the study 55
4.1: sample companies listed in the
Nigerian stock market 56
4.2: Definition of events for the
study 57
4.3: Result of average abnormal
returns and CAR for H01 58
4.4: Result of average abnormal
returns and CAR for H02 59
4.5: Result of average abnormal
returns and CAR for H03 60
4.6: Test for Arch Effect 62
4.7: GARCH (1,1)- Normal 63
LIST
OF FIGURES
1: Illustration
of the year to date (YTD) of industry sector performance in
the Nigerian stock market 18
2: Definition of the estimation period 47
CHAPTER
1
INTRODUCTION
1.1. BACKGROUND INFORMATION
History has revealed overtime that
politics and economic performance are intertwined. Political events usually
have a great impact on the financial market. In many cases, the market
fluctuates because of political announcements such as regulation promulgation,
law amendments or national election results. Pantzailis, Stangeland and Turtle
(2000), argued that political elections are particularly among many kinds of
political events that influence the financial market for several key reasons.
First, election provides voters (and investors) with an opportunity to
influence the course of economic policies; second, elections attract the attention
of media enabling political and financial analysts filter information, and
disseminates such information to the financial market which might influence
investors’ behavior.
The stock market plays a major role
as an economic institution which enhances efficiency in capital formation and
allocation. It enables both corporations and the government to raise long term
capital which enables them to finance new projects and expand other operations.
Alile (1984), observed that the performance of the economy is boosted when
capital is supplied to productive economic units. Furthermore, as economies
continue to develop; additional funds are needed to meet capital expansion and
the stock market serves as an appropriate tool in the mobilization and
allocation of savings among competing uses which are critical to the growth and
efficiency of the economy (Olweny and Kimani, 2011). It is in this light that
the stock market acts as a barometer for measuring economic performance in the
sense that, it exists to allocate the necessary capital needed for the
consistent growth of an economy.
On the other hand political risk is
one of the crucial factors influencing the operation of a country’s financial
market. It can come in many forms such as new sets of legislation, terrorism,
an election, or a change in the county’s regime. The performance of a stock
market of an economy is of interest to various parties including investors, capital
markets, the securities exchange commission and government among others as it
affects the general standard of living in the economy (Kabiru, Ochieng and
Kinyua, 2015). Election results may affect both pre and post –election
corporate performance either by influencing a country’s overall economy or
influencing domestic and foreign investors via changes in government spending
and/or fiscal changes, or through company or sector specific decisions as a
result of the changes made by the new administration. The latter effect is
typically associated with electoral partisanship defined as polarized
ideologies of governance and policy making (Oehler, Walker and Wendt, 2011).
The allocation of change, however, is not systematic across the market and can
be either beneficial or harmful for single companies/sectors. In addition, the causality
between election result and economic performance is not always clearly
identifiable since underlying economic conditions (particularly hardship)
heavily influence public opinion and voting results (Fiorina, 1991).
A number of the transition economies
of West African countries have seen a large upsurge in the stock market during
the past decade (Henriot, 2003). This increase in some of these countries has
attracted a lot of interest and has spurred an extensive empirical literature
to uncover the reason for this performance of the stock market during the era
of transition. Therefore, election results and the stock market have become
popular topics for research (Wisniewski, Lightfoot and Lilley, 2012).
Prior to an election, there are
always lots of activities in the trading floor as investors forecast their
expectations into the stock prices in lieu that it will be favourable to them
(Oehler, et al., 2011). In Nigeria,
presidential elections are key inflection point of change in the political
arena. As such, an increasing likelihood of a candidate’s victory should be
reflected in the stock market. However, expectations about election result are
not always clear- cut resulting to an increase in future markets volatility in
tight elections due to uncertainty about election results and implications
(Jones 2008).
Information asymmetry has been shown
to exist between the market and political parties during election periods. He,
Hai, Chunchi and Uric (2009), report difficulties of market participants to
distinguish fact from ‘political soap boxing’ due to skepticism caused by
political posturing, such as short term stimulation of the economy to reduce
unemployment and increase likelihood of re-election (Alesina and Sachs, 1986).
The political economy theoretical
framework provides a basis for understanding the relationship between politics
and the stock market. Gilpin (2001), describes this relationship as
“interactive”. As is seen from the prism of historical events, business
attempts to promote a political agenda that supports their goal (Caro, 2002).
The reason that some business sectors are willing to spare massive amounts of
money to promote a specific candidate or political agenda is because the
winning candidate’s agenda has a direct impact on the business environment.
The Nigerian national election (2015)
is most intense and uncertain election in Nigeria political history. Because,
the Northern region of Nigeria that was in power was succeeded before his
tenure expiration by a southern and has ruled for six years. Nevertheless,
there have been several turbulent events ranging from terrorism to economic
instability such that people need a new government which would be helpful to
ameliorate the situation.
In any democratic economy, the
process of achieving and predicting the level of economic growth and
performance is often pegged against stability of the country’s political
environment. This according to Alesina, Nouriel and Gerald (1997), implies that
voters tend to cast their votes based on the economic parameters such as
inflation rates, interest rates, performance of the money market as well as
perception on foreign investment. Voting behavior is retrospective in that it
depends on economic performance under the incumbent in the past (Kim and Mei,
2001).
1.2. STATEMENT OF THE PROBLEM
Academic literature that has been
studied in the past on the impact of political event on the performance of
stock markets have shown different
results with a group of researchers supporting a positive significant impact on
the stock market performance such as (Wolfers and Zitzewitz, 2007; Brunner,
2009; Sookios and Kapopoulos, 2007; Furio and Pardo, 2010) while some other
group of researchers suggest a positive insignificant impact on the stock
market performance such as (Alesina and Sachs,1986; Fiorina, 1991; He,et al; 2009). The general election
periods are recurring in nature and may affect both the political and
investment environment of a given country. Campello (2007), observed that
upcoming general elections may create uncertainty which may affect investor’s
decision and behavior. Having seen that during election periods the economy is
surrounded with a lot of uncertainties regarding future economic and financial
policies, it becomes expedient to determine if political events such as
elections influence stock market returns. This study therefore seeks to examine
whether uncertainties surrounding national elections have any significant
impact on the stock market performance by studying the past three national
elections in Nigeria (2007; 2011; and 2015).
The opportunistic Political Business
Cycle (PBC) implies that policy-makers systematically aim for a rise in stock
prices preceding elections (Vuchelen, 2003), while Uncertain Information
Hypothesis (UIH) proposed by Brown, and Harlow (1988, 1993) assumes that
investors set prices before an event takes place. In responding to the loss of
confidence in the market by the investors stock prices are set below their
fundamental values. An upward corrective trend in security prices will follow
as the election result becomes more certain. As a result of the loss of
confidence in the market induced by election, the risk adjusted expected return
should fall and stock prices should rise. However, Mehdian, et al., (2008) noted that the greatest
degree of uncertainty resolution and thus the highest observed returns should
be expected in the time period immediately preceding the election date as this
is when media coverage and campaigning are at their peak. Therefore, this
research work will investigate how general elections results influence
investor’s level of confidence in the market and market performance.
Stock price volatility has grown to
become an issue of concern in the economy and as such have attracted a lot of
interest from different finance scholars. The relevance of this study cannot be
overlooked due to the fact that financial market development and with
particular regard to the stock market can be an engine for promoting economic growth
and development. In an effort therefore to better understand the relationship
between stock market volatility and national elections, more and more case
studies might better identify the causal linkage between stock market volatility
and national election. Hung (2011), demonstrated the fact that elections and
stock market fluctuation are intertwined. In addition, that there is positive
reaction over the stock exchange 15 days prior and 15 days after elections
which has been proven by conducting an event study. This study therefore, seeks
to ascertain the existence of volatility in stock market and possible
connections to national elections result. The present research study also
followed the same line of thinking and examined the causality between stock
market volatility and the national election in Nigeria. The study therefore
sought to examine the presence of casual linkage if any, between the stock
market volatility and national elections in Nigeria.
1.3. OBJECTIVES OF THE STUDY
This study has the general purpose of
examining the impact of elections results on the performance of the Nigerian
stock market. The specific objectives are as follows:
i.
To investigate the impact
of the 2007 national elections result on performance of the stock market.
ii.
To explore the impact of
the 2011 national elections result on performance of the stock market.
iii.
To determine the impact
of the 2015 national elections result on performance of the Nigerian stock
market.
iv.
To ascertain the existence
of volatility in stock markets and possible connection with the 2015 national
elections result.
1.4. RESEARCH QUESTIONS
As
a follow-up to the above objectives, these are the research questions raised.
i.
To what extent did the
stock market react to the result of 2007 national election results?
ii.
What influence did the
2011 national election results have on the Nigerian stock market?
iii.
How did the stock market
react to the 2015 national election results?
iv.
In what way did the 2015
national election results affect the stock market volatility?
1.5. HYPOTHESES
This study seeks to test the
following specific hypothesis.
Ho1:
2007 Nigerian national election results did not have any significant effect on
performance of the Nigerian stock market.
H02:
2011 Nigerian national election results did not have any significant effect on
performance of the Nigerian stock market.
H03:
2015 Nigerian national election results did not have any significant effect on performance
of the Nigerian stock market.
H04:
2015 national election results did not have any significant influence on stock market
volatility in Nigeria.
1.6. SIGNIFICANCE OF THE STUDY
Previous literature has demonstrated
that stock market plays an important role in promoting economic growth. Stock
market also reflects the country’s status. Stock market has been impacted by
many factors which include politics, sports, weather condition etc; and these
factors should be harnessed by operators of the stock market to drive the sale
of shares. It is important to understand how the political events have affected
the returns of Nigerian stock exchange.
The main significance of this study
is to provide empirical evidence on the effect of political elections on stock
market. Hence, this study is of significance to the stock market participants
which include market regulators, investors, foreign direct investment,
government, brokers etc. However, we will discuss how significant it is to two
major participants in the market:
Market
regulators: The security exchange commission is
the apex regulator of the Nigerian stock exchange. This study is of great
significance to securities exchange commission as it will enable them have a
better understanding on how political events could influence the returns in the
market. This study will assist them to know how to co-ordinate the market on
events as such to drive the sale of shares without extreme abnormal gain by
investors.
Investors:
A better understanding on the political events anomaly could be useful for
individual investors on minimizing exposures to the political and electoral
shocks; and provides investors a guidance to stylishly adjust their portfolio
exposure by embedding the political events into the consideration of portfolio
allocation. It will also provide investors seasonal opportunities of obtaining
superior capital gains without exposure to additional risk.
1.7.
SCOPE OF THE STUDY
This
study explains the impact of Nigerian national elections on the performance of
the Nigerian stock market. The focus of this research is to study the Nigerian
national elections result and the stock market using the Nigerian stock
exchange all share index as a proxy for stock market performance and some
selected companies of different sectors have been taken for the analysis. The
study covered three general election period 2007, 2011 and 2015.
1.8. LIMITATIONS OF THE
STUDY
This
study was not without limitations, as there were constraints on the course of
investigation which will be highlighted. There are different levels of market
efficiency between Nigeria and other research backgrounds which may unfavourably
influence the research outcome. This is because major researches regarding
political elections were carried out under the context of developed country
with long history of stock market.
Also,
difficulty in accessing data for the analysis was a major constraint to the
research. The cost and time required for the study was also another constraint
in the study.
1.9. OPERATIONAL
DEFINITION OF TERMS
Abnormal return:
It is the difference between the actual return of a security and the expected
return. Abnormal return is sometimes triggered by events.
Events: In
finance is typically classified as information or occurrences that have not
already been priced by the market.
Event day: The
event day is defined as the very first occurrence of the event as published in
the national dailies. This is because financial markets react to the
announcement of an event, rather than the event itself.
Event window: The
event window is the length of time which allows the effect of the event of
interest to be properly incorporated or observed in the market. Event window
shows how many days will returns be calculated before and after the event date.
For example, a 6 day event window is represented as -2 + 3 where 0 is the event
day.
Pre-event window: The
pre-event window is a normal period that is entirely free from the influence of
the event. That is the period in which the market is completely free from
external influences.
Cumulative abnormal return:
The cumulative abnormal return is the
calculation of the aggregate abnormal returns over the event window.
Risk:
Risk is defined as exposure to or the possibility of loss, injury or other
adverse or unwelcome circumstance. Risk is an uncertain event or condition that
if it occurs has an effect on at least one project objective. In finance, the
possibility that an actual return or an investment will be lower than expected
return.
Uncertainty:
Is the situation which involves imperfect and/or unknown information. It is a state
of having limited knowledge where it is impossible to exactly describe the
existing state, a future outcome or more than one possible outcome.
Behavioral finance:
According to Shleifer (1999) behavioral finance is defined as a rapidly growing
area that deals with the influence of psychology on the behavior of financial
practitioners. Hence, behavioral finance focuses on how investors interpret and
act on information to make investment decisions.
Volatility:
A variable in option pricing formula showing the extent to which the return of
the underlying asset will fluctuate between now and the option expiration. In
other words, volatility refers to the amount of uncertainty or risk about the
size of changes in a security’s value.
Current market price: Is
the standardized price that is taken periodically to track the change in value
of the investor’s assets. It is usually taken as the closing price for listed
securities or the bid price offered for over the counter (OTC) securities.
All share index:
A market index is a quick measure to judge the overall direction of the market
and the scope of its movement. It is a representative of the entire market. It
is a total market index, reflecting a total picture of the behavior of the
common shares quoted on the Nigerian stock exchange.
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