ABSTRACT
This research work examines the
impact of Capital Market Financing on Economic Development in Nigerian. It also
examined theories that have postulated the key role of capital accumulation in
the process the economic development of nation. Although, capital can be
mobilized from different sources, both theoretical and empirical analysis have
different long term sources of finances are more veritable from productive capital
investment. Consequently, the capital market plays a key role in this mediation
process.
Emphases have been placed on
indicators of stock market size, liquidity and growth over a period of twenty
tears; together with their combined effects on the rate of economic growth and
development within the Nigerian context. Empirical data were collected and
analyzed. The result of the analysis showed a positive relationship between the
independence variables measures and their impacts on economic growth in Nigeria
as measured by the gross domestic product (GDP).
However, linking the paucity in
capital market instruments as well as expansion of capital market finances to
increase in real productive investment and development it was discovered very
little is achieved in is respect.
TABLE OF CONTENT
CHAPTER ONE:
1.1 Introduction
1.2 Statement of Production
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Research Methodology
1.7 Method of Data Collection
1.8 Method of Data Analysis
1.9 Significance of Study
1.10 The Scope and Limitation of Study
1.11 Definition of Terms
CHAPTER TWO;
LITERATURE REVIEW
2.1 Introduction
2.2 Concept Capital Market
2.3 Role of Capital market
2.4 Efficient Market Hypotheses
2.5 Capital market Development and Successful Operation
2.7 Evolution of the Nigerian Capital Market
2.8 Structure of the Nigeria Capital Market
2.9 Instrument of Capital Market in Nigeria
2.10 Contribution of Stock Exchange of Formation
2.11 Problems of the Nigeria Capital Market
CHAPTER THREE:
RESEARCH METHODOLOGY
3.1 Introduction
3.2 Research Methodology
3.3 Method of Data Collection
3.4 Method of Data Analysis
3.5 Re-Statement of Hypothesis
3.6 Model Specification
3.7 A Priori Expectation
3.8 Specification of Data
CHAPTER FOUR:
DATA ANALYSIS AND INTERPRETATION OF RESULT
4.1 Introduction
4.2 Empirical Result
CHAPTER FIVE:
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of findings
5.2 Conclusion
5.3 Recommendations
Appendix I: Regression Analysis
1
Appendix II: Regression
Analysis II
Appendix III: Regression
Analysis III
Appendix IV: Regression
Analysis IV
Appendix V: Bibliography
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND OF THE STUDY
Economic development form of
the core macroeconomic objectives which every nation strives to achieve. It is
a state of sustained increase in the real per capital income, which is not
accompanied by widening inequality and without increasing the number of people
living below the poverty line (Jhingan, 1981). Thirlwall (1983) stressed that
development holds when there is an improvement in basic needs and economic
progress has contributed to a greater sense of self esteem for the countries
and individuals within it and material advancement has expanded the range of
choice for individuals.
In a nutshell, economic
development is conceptualized as economic growth, accompanied by desirable
social change or equitable distribution of income and socially optimal
resources. 'Utilization' (Fashola 1998).
From the foregoing, it become
evidence that economic development inevitably involves economic (growth). The
growth process typically involves instituting long term investment projects
that are capable of stimulating the productive capacity of the economy.
In the third world countries
policy makers a d the international community have always expressed great
concern about the level of under development. The need for a reduction in the
level of poverty, increase industrial capacity utilization, reduce the rate of
the unemployment, price stability among others are some of the consideration of
those in government.
The achievement of the laudable
objectives of economic development is hanged on the availability old the
necessary infrastructures, which facilitates the mobilization of development
input and all these are long term in nature. It then follows that the success
of any economic development effort will be dependent on the availability of
long term financing, which would support long term investment.
The link between the capital
market and economic development is that the capital market provides this long
term financing arrangements.
The Collins dictionary of
economics defined capital market as a “market for long term company loan
capital, share capita and government bonds. In the same vein, it has been
described as the "complex of institutions and mechanism through which
intermediate term funds and long term funds are pooled and made available and
instruments already outstanding are transferred". Kadiri (1992) also
defined capital market as a market where scarce long term funds are mobilized
and efficiently allocated to achieve economic growth and development. Furthermore,
it has been described as an exchange mechanism that brings together sellers and
buyers of a product or service, factors of production of financial securities".
The capital market principally,
act as financial intermediary that help to mobilize funds from the surplus
sector to the deficit sector of an economy in order to foster the ace of
economic development.
The cores of the capital market
are the banks d the stock exchange market. Both of them differs in the type of
services that they render; but theories and empirical investigations have been
advanced at they contribute significantly to the economic development of any
nation.
For instance, in a study conduct
by Levine an Zervous (1996) using data of forty nine (49) countries from 1976
to 1993, they discovered that of stock market liquidity, size, volatility and
integration with international capital accumulation, productivity improvements
and private savings.
The existing literatures
clearly show that dev loped economies had explored the two channels through
which resources mobilization affects economic growth and development - money
and capital market (Samuel, 1996; Demigue - Kunt and Levine, 1996). This is
however, not the case in developing economies where emphasis is money market
with little consideration for capital market (Nyong, 1997). Since the introduction of Structural
Adjustment Programme (SAP) in Nigeria, the country's stock market has grown very
significantly (Alile, 1996; Soyede, 1990). This is as a result of deregulation
of the financial sector and the privatization exercise which exposed investors
and companies to the significance of the Stock market. Equity finance became
one of the cheapest and flexible source of finance from the capital market and
remains a critical element in the sustainable development of the economy (Okereke
- Onyiuke, 2000).
The link between stock market
performance and economic growth has generated strong controversies among analyst
based on their study of emerging market (Samuel, 1996 Obadan, 199 ). According
to Nyong (1997), the financial structure of a firm that is the mix of debt and
equity financing changes as economics develop. The tilt is however more towards
equality financing through the stock market. As economic develop, more funds
are need to meet the expansion. The stock market serves as a veritable tool in
the mobilization and allocation of saving among competing users which are
critical to the growth and efficiency of the economy (Alile, 1984).
Though the stock market is
growing it is however characterized by complexities. The complexities arise
from the trend in globalization and increased variety of new instruments being
traded; equity options, derivatives of various from, index futures etc,
However, the central objective of the stock market worldwide remains the
maintenance of efficient market with
attendant benefit of economic growth (Alile, 1997).
Consequently upon the above
theoretical assertions, the central thrust of this research project was to
investigate empirically the impacts or the extent to which the Nigerian Capital
Market (particularly the stock exchange market) in term of size, liquidity and
institutional framework have contributed to economic growth and development in
Nigeria.
1.2
STATEMENT OF THE PROBLEM
The global economy in recent
times has experienced a great depression and series of financial crises. This
is followed by a drastic fall in the prices of global financial instrument like
shares, commodities, options forwards futures among others. All these have considerable
impacts on the global financial market in terms of their ability to mobilize
and efficiently allocate long term funds needed to foster the ace of economic
growth and development. The reasons adduced for such global failure of stock
market was owing to the declining consumer spending and weak corporate
performance. In United State, for instance, subprime mortgage lending crises
sparked off credit squeezed and in teased cost borrowing in many developed
economies.
Since Nigeria is a part of the
global economy, it also felt an hitch from the global crises. This is evidenced
by the de lining prices of securities in the stock market since the beginning
of 2008 However, policy makers have claimed that all economic indices indicate
that Nigeria can withstand the shock of global financial crises (Soludo 2008).
They argued that Nigerian has witnessed a growth rate in GDP from 5.6% in 2006
to 6.3% in 2007 and 8.5% by second quarters of 2008, an increase in external
reserve from US$42.3B in 2006 to US$50.75B in 2007 and US$63B by October 2008.
Apart from this, inflation rate remained within the single digit target while
the CBN was able to defend the Naira exchange rate which appreciated by 8.03%
to close at NI16.8/US$ in December 2007.
No doubt, all these policy
measures ha a significant impact on the performance of the stock market. For instance,
the total new issues increased to stand at nl.79B in 2007 as against N5.30M in
2006 nominal value terms. The market capitalization also increased from N4.2
trillion in 2006 to NI0.18 trillion in 2007. The volume and value of trade also
showed a remarkable II improvement between 2006 and 2007.
Nonetheless the growth of the
capital market, the real sector have not really benefited immensely from the
liquidity created by the stock market. For instance, the Manufacturer
Association of Nigeria (MAN) reported a drop in the manufacturing capacity
utilization from 44.06% in 2006 to domestic product (GDP), which measures the
impact of stock market size on economic growth, revealed that the proportionate
growth in GDP is less than that of the stock market. Apart from is, the
stringent conditions put in place by the regulators of the market also make it
difficult for small and medium firm to gain access to the stock exchange
market. In 2007, it was recorded that the banking and insurance sub-sectors
accounted for nineteen of the top twenty companies in terms of trade volume as
a result of the fallout of the recapitalization programme that took place in
2005.
Consequently, the two
sub-sector dominated the Mock market at the expense of others subsector; thus
reducing the availability of fund productive sector of the economy.
The emphasis of the market
player have been that of value creation for the shareholders in the form of
dividend and capital gain rather focusing on real economic growth by
judiciously all eating fund to the productive sectors of the economy.
Although economic literatures
have pr dieted a positive correlation between the stock market and economic growth,
we cannot affirm whether this is true in the case Nigeria in view of the above
factors.
It is on this basis that the
researcher has intended to explore empirically the relationship between stock
market (in terms of financing, liquidity, size, and volatility) and economic
growth and development in Nigeria.
1.3
OBJECTIVE OF THE STUDY
The key purpose of this
research work as to empirically the impact or extent to which capital market
finance, particularly the stock exchange market have contributed to economic
development in Nigeria.
Based on this, the general
objectives of the study are outlined below:
1. To evaluate the role capital economic growth and development
of Nigeria.
2. To identify the factors
mitigating the development of capital market in Nigeria.
3. To evaluate the impact of
market capitalization ratio on gross domestic product and capital formation in
Nigeria.
4. To examine the effect of stock market liquidity on the real
output in Nigeria.
1.4
RESEARCH QUESTIONS
i. What are the roles of the Capital Market towards economic
development?
ii. What are the major problems
confronting the growth of capital market in Nigeria?
iii. Does the stock market capitalization growth and development?
iv. Does the market liquidity
have any significant relationship with gross domestic product, capital
accumulation and private saving in Nigeria?
1.5
RESEARCH HYPOTHESES
Hypothesis one
H0: There is no significant relationship between
market Capitalization ratio and gross domestic product in Nigeria
H1: There is a significant relationship between
market Capitalization ratio and gross domestic product in Nigeria
Hypothesis two
H0: There is no significant relationship between
stock market turnover ratio and gross domestic product in Nigeria
H1: There is a significant relationship between
stock market turnover ratio and gross domestic product in Nigeria
Hypothesis three
H0: There is no significant relationship between
the value traded ratio and gross domestic product in Nigeria
H1: There is a significant relationship been the
value traded ratio and gross domestic product in Nigeria.
Hypothesis four
H0: There is no significant relationship between
new issues of equity and debt capital on gross domestic prod t in Nigeria
HI: There is a significant relationship between
new issues of equity and capital on gross domestic product in Nigeria.
1.6 RESEARCH METHODOLOGY
As examined in the details
later, this study explored a time series data for a period of twenty years
covering 1980 to 2009 for all the relevant variables being studied. The least
square method of regression analysis
using SPSS was examined the extent to which the explanatory variables affect
economic growth and development in Nigeria.
1.7 METHOD OF DATA COLLECTION
Secondary sources of data
generation is employed in other to obtain the variables for the purpose of
answering the research questions, testing the hypotheses and achieving the
research objectives, the researcher explored secondary sources of data like;
textbook , magazines, newspapers, CBN research library, National Bureau of
Statistics, Achieves among others.
1.8 METHOD OF DATA ANALYSIS
The use of economic analysis is
employed to text for the relationship between dependent and independent variables.
The least square method of regression analysis using SPSS was used to examine
the extent to which the independent variable affects the economy.
1.9 SIGNIFICANCE OF STUDY
The standard of living of every
citizen is important for the socio-economic development of that nation. This
study hopes to improve the effectiveness of capital market financing on
economic development in Nigeria. Relevant data on this study can be adopted by
policy planners, government offices and the masses can as well adopt relevant
data on this study. The study is interested in helping to reposition the role
of capital market finance towards nation building particularly as Nigeria
intends to be amongst the 20th nation by the year 2020.
The result of the study
reviewed what could be done to promote a well functioning capital market that
can effectively mobilize the needed fund for the socio-economic development of Nigeria.
Apart from contributing hew
knowledge to academic discipline; this study also serves as a good secondary
data for other researchers who might be interested in conducting a future
similar research in the area of the impacts of capital market finance on
economic development in Nigeria.
1.10 THE SCOPE AND LIMITATION OF STUDY
The capital market is a bread
concept; consequently, it is made up of so many participants, intermediaries
and instruments. Examples of institutions within such market includes: banks,
Stock exchange, Insurance companies, Pension fund Administrators, Mutual fund
managers Units trust among others.
However, the entire research
work has concentrated on the stock market because it is the hub of the capital
market where cheap permanent source of capital like equity, shares are obtained
little emphases was placed on banks source of finance like loan because the
stock exchange market also provides similar financial instrument like bank
loan. Such instrument includes: corporate debenture, loan stock and government
development bonds. Also the research work only examined a time series data for
a period of twenty years covering 1980 to 2009 for all relevant variables being
studied.
Nevertheless, finding of the
data considered the peculiar circumstances of the study area.
It would be fallacious to claim
that the research was constrained free. The research project was limited due to
several constraint; chief amongst which are:
i. Time Factor: The time duration was not enough to collect
and collate more past studies on the topic for evaluation so as to give more information
on the topic.
ii. Financial Constraint: The
high cost of materials restrained the researcher from testing more models which
will further enhanced the result to be derived from the study.
iii. Information: Another
limitation faced by the researcher is the sensitivity of certain data required
for the purpose of this research. As such, this led to the dearth of relevant
statistical information.
1.11 DEFINITION OF TERMS
Active market: A
loose term denoting a high liquidity in a stock market
Asset Allocation:
The process of deciding how to apportion investment capital between the various
asset classes bond, stock, property, cash etc.
Arbitrage:
This is the simultaneous purchases I and
sales of two different but closely related securities to take advantage of
disparity in their prices; alternatively, it is the purchases and Bale of the
same security in different market.
Bear market: A
market in which seller out number buyer and where the trend of shared prices is
consequently falling one.
Bull market: A
market in which prices are raising and in which investors confidence in the
continuation of rising is high.
Blue Ship: A
company with large market capitalization stable earnings and consistent
dividend record.
Bond: The generic
name for trade-able loan securities issued by government and companies as a
means of raising capital.
Business cycle: More or less regular fluctuation in aggregate economic
activity between peaks and troughs typically over a five to ten years period.
Capitalization: (1) the injection of fund or capital into an economy.
(2) The process by which a
company converts its cash reserve into new shares and issue them to equity
shareholders on porata basis.
Capitalization ratio: Ratio of market capitalization to GDP. It is a measure of
stock market size.
Debt instruments: A promise in writing to repay debt, eg Bond Bill,
Commercial paper, bankers acceptances, notes etc.
Debt securities: A securities such as bond or notes with special interest
rate representing a loan which is repayable as some future date.
Deals: The number of times a security is traded in a day.
Derivative: A collective term for securities whose price are based on
the price of
another (underlying)
investment.
Domestic market: The part of the country's market that trades the security
of entities located within that nation.
Equity: The amount which a shareholder own in a publicly quoted
company. Financial strength: A measure of a company's solvency, looking
at the relationship between its asset and liabilities.
Financial instrument: A means of transferring fund from the surplus sector to
the deficit sector of an economy.
Future contract: A legal agreement to make or take delivery of a specified
instrument (such as share or foreign currency) or commodity (such as cotton or
cocoa) at a fixed date at a price determined at a time of dealing.
Going public: The final act of listing a company's share on the stock
exchange market.
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