ABSTRACT
This study examines the impact of stock exchange on Nigerian economic growth from the period of 1990-2022. The economic growth was proxies by Gross Domestic Product (GDP) while the capital market variables considered include; Market Capitalization (MCAP), All Share Index (ASI), Value of Transactions (VTS), and Total New Issues (TNI). Secondary data was collected from Security and Exchange Commission reports, National Bureau of statistics and Central Bank of Nigeria Statistical Bulletin. Descriptive statistics, Pearson correlation and multiple regression analysis are used to analyze the data. The result shows that, Gross Domestic Product (GDP) has a positive relationship with Market Capitalization, All Share Index, Value of Transactions, and Total New Issues. It is recommended therefore that that government should put up measures to build up investors’ confidence in the capital market; also the regulatory authority should initiate policies that would encourage more companies to access the market
TABLE
OF CONTENT
Title
Page - - - - - - - - - - - - -i
Approval
Page - - - - - - - - - - - -ii
Declaration
- - - - - - - - - - - -iii
Certification
- - - - - - - - - - - -iv
Dedication
- - - - - - - - - - - - -v
Acknowledgment
- - - - - - - - - - -iv
Table
of Content - - - - - - - - - - - -vi
Abstract - - - - - - - - - - -v
CHAPTER
ONE
INTRODUCTION
1.1 Background of the Study - - - - - - - - -1
1.2 Statement
of the Problem - - - - - - - - -7
1.3 Objectives
of the Study - - - - - - - - -7
1.4 Hypothesis of the Study - - - - - - - - -8
1.5 Significance of the Study- - - - - - - - -8
1.6 Definition of
key terms - - - - - - - - - -8
1.7 Scope of the Study- - - - - - - - -9
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction - - - - - - - - - -10
2.2 Conceptual Literature review - - - - - ---- - -10
2.2.1 The Concept of Stock Market - - - - - - - -10
2.2.2 Overview of the Nigerian capital
market - - - - - -13
2.2.3 Function of Nigerian Stock Market - - - - - - -13
2.2.4 The Nigerian Security and Exchange
Commission - - - - -14
2.2.5 The Nigerian Stock Exchange - - - - - - -16
2.2.6 The Concept of Economic Growth - - - - - - -17
2.3 Theoretical framework - - - - - - - - -18
2.3.1 Demand following theory- - - - - - - -18
2.3.2 Endogenous Growth Theory- - - - - - - -18
2.3.3 Vicious cycle of poverty - - - - - - - -19
2.3.4 Big Push Theory- - - - - - - - -19
2.3.5 Unbalanced Growth - - - - - - - - -20
2.3.6 Growth Theory - - - - - - - - -21
2.3.7 Efficient Market Theory- - - - -- - - -21
2.4 Review of Empirical Studies - - - - - - - -23
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction - - - - - - - - -- -30
3.2 Research Design- - - - - - - - -- -30
3.3 Area of the Study - - - - - - - - -31
3.4 Population of the Study - - - - - - - -31
3.5 Sample and Sampling Techniques - - - - - - -31
3.6 Econometrics Model (Empirical Model) - - - - - -32
3.7 Definition and Measurement of
Variables - - - - - -33
3.7.1. Gross Domestic Product (GDP) - - - - - -33
3.7.2. Stock Exchange - - - - - - - - -34
3.7.3 Capital Stock - - - - - - - - -34
3.7.4 Compensation of Employees - - - - - - -34
3.8
Consistency and Reliability Test - - - - - - -35
CHAPTER FOUR
PRESENTATION OF RESULT AND DATA ANALYSIS
4.1 Presentation
of Regression Results-- - - - - - - -37
4.2 Analysis of
the Result - - - - - - - - - -37
4.2.1 Analysis of the Regression Coefficients - - - - -37
4.2.2 Analysis of
the Evaluation Methods - - - - - - -38
4.2.2.1Evaluation Based On Economic
Criteria - - - - - -38
4.2.2.2
Evaluation Based On Statistical Criteria
- - - - - -39
4.2.2.3 Econometric Criteria (Second-Order
Test) - - - - - -41
4.3 Hypothesis Testing - - - - - - - - - -44
CHAPTER
FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of findings - - - - - - - - - -45
5.2 Conclusion-- - - - - - - - - - - -45
5.3 Recommendations - - - - - - - -46
5.4 Suggestions
for Further Studies - - - - - - -47
5.5 Contribution to Knowledge - - - - - - - -48
Bibliography
Appendix
CHAPTER ONE
INTRODUCTION
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 (Obamiro 2020). 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 (Osinubi
2022) 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 (Nyong 2020).
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:
- Mobilize long term savings for financing long tenure
investments;
- Provide risk capital (equity) to entrepreneurs;
- Encourage broader ownership of firms; and
- Improve the efficiency of resource allocation through
competitive pricing mechanisms.
- 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:
- Lower cost of equity capital for firms;
- Imposition of discipline on corporate managers as share
prices react to right and wrong judgment in firm’s investment decisions;
- Existence of mechanisms for appropriate pricing and
hedging against risk; and
- 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.(Mohtadi 2022).
In well-developed capital markets, shareholding 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:
- Stocks provide an incentive to save and invest; and
- 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 (2019) 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 (2022) 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; (2021) 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 (2021) 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 (2020), 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,
2018). 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, 2019). 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), 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 (2020) 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 can play a role in inducing economic growth in less developed
country like Nigeria by channeling investment where it needed from
public. Mobilization of such resources to various sectors certainly helps
in economic development and growth. Stock market development has assumed a
developmental role in global economics and finance because of their impact they
have exerted in corporate finance and economic activity. The role of financial
system is considered to be the key to economic growth (Neupane, et. al; 2021). States that stock
markets, due to their liquidity, enable firms to acquire much needed capital
quickly, hence facilitating capital allocation, investment and growth. Stock
market activity is thus rapidly playing an important role in helping to
determine the level of economic activities in most economies Tuladhar (2019)
states that financial markets are catalyst in the development of economy. The
study further added that developed economies have highly sophisticated financial
institutions. Over the past decade, many developing economies have established
capital markets as they moved towards more liberal economic policies. These
emerging markets have shown extraordinary growth with very high volatility,
which have attracted many investors into these markets.
1.2 STATEMENT OF THE PROBLEM
Mobilization of resources for national development has long been
the central focus of development. To this end, various papers, research works,
seminars, e.t.c. have been written and held to find the best way to mobilize
resources for economic growth. It is now increasingly being recognized that the
growth process of the Nigerian economy depends to a considerable extent on the
effects of stock market. Whether this effect is positive or negative is a
research problem to be solved. In the light of the research problems, the key
question this study attempts to answer is:
i.
Does the Stock Market Performance have an effect on the GDP?
ii.
What is the impact of change in investment links on the growth of
Nigeria stock market?
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the impact which
the stock market plays in the growth process of the Nigerian economy.
However, the specific objectives include:
i.
To determine if the market capitalization can lead an economy
to growth
ii.
To examine the nature of relationship
between All Share Index and Economic Growth in Nigeria.
iii.
To determine the impact of change in investment links on the
growth of Nigeria’s stock Market.
1.4 HYPOTHESIS OF THE STUDY
The hypothesis tested in this study is:
H0: there is no significant impact of Stock Market
performance on economic growth.
H0: changes in investment links have no significant impact on
the growth of Nigeria’s stock Market.
H0: There is no relationship between
All Share Index and Economic Growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
Due to the fact that there are no viable equity markets, the
capital structure of firms are generally characterized by heavy reliance on
international finance and bank borrowings which tend to raise debt/ equity
ratios.
Thus, the development of an active market for stocks could provide
an alternative to the banking system for both savers and users of funds.
There are a lot of studies about the connection between stock
prices fluctuations and economic growth as well as other economic variables
which have detected that changes in stock prices reflect real economic
situation. Economic growth through the changes in levels of real economic
activities affects profitability and activity of firms.
1.6 DEFINITION OF KEY
TERMS
Stock Exchange: A stock exchange is a regulated financial
marketplace where securities, such as stocks, bonds, commodities, and
derivatives, are bought and sold by investors. It serves as a platform for
companies to raise capital by issuing shares to the public and for investors to
trade these securities.
Impact: In this context, "impact" refers to the influence or
effect that the activities and performance of the stock exchange have on
various aspects of Nigeria's economic growth. This can encompass both positive
and negative effects.
Nigeria's Economic Growth: Economic growth in Nigeria pertains to the
expansion of the country's overall economic output or Gross Domestic Product
(GDP) over a specific period. It typically signifies an increase in the value
of goods and services produced within the country and is often measured in
terms of percentage change in GDP.
1.7. SCOPE OF THE STUDY
This study appraises the performance of the stock exchange in
consonance with its impact on the success or failure of the Nigerian economy.
The scope of the study is based on the Nigerian stock exchange
from the key sectors of the economy.
The study examines the performance level over a 22 year period
(2000-2022). The reason being that, a study period this long will, probably,
reduce any form of bias in the results of estimate.
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