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.
TABLE OF CONTENT
Title Page ……………………………………………………………….i
Approval Page ……………………………………………………….ii
Dedication ……………………………………………………………...iii
Acknowledgement …………………………………………………iv
Abstract …………………………………………….………………v-vi
Table of Content ………………………………………………..vii-viii
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 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. 2006). Paudel (2005) 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 (1996)
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:
1. Does the Stock Market Performance
have an effect on the GDP?
2. 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 role which the stock market plays in the growth process of the
Nigerian economy.
However, the specific objectives
include:
1. To determine if the market
capitalization can lead an economy to
growth
2. 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.
HO: changes in investment links
have no significant impact on the growth of Nigeria’s stock Market
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. As a
result, with changes in profitability prospects, expected earnings and
dividends of shares, stock prices fluctuate (Fama, 1990; Ferson and Harvey,
1993; Cheung and Ng, 1998; Mauro, 2003; Ritter, 2004; Liu and Sinclair, 2008;
Shahbaz et al., 2008).
On
the other hand, other studies have examined the impact of stock prices on
macroeconomics indicators. According to the results of these investigations
share prices fluctuations play a role in directing economic activities in the
medium and long term. Stock prices reflect the expectation of public towards
the future economic activity. In other words, the stock market is
forward-looking and stock prices reflect anticipations about future economic
activity. If a recession is expected, for example, then stock prices reflect
this by decreasing in value whereas large increase in stock prices may reflect
the expectation towards future economic growth (Jefferis and Okeahalam, 2000;
Nasseh and Strauss, 2000; Mauro, 2000; Shirai, 2004; Adajaski and Biekpe, 2005;
Mun et al., 2008). This work represents an attempt to close the gap between
these different literatures, by examining the impact of stock market
performance on the growth of Nigeria economy.
1.6 SCOPE
AND LIMITATIONS 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 28 year period (1980-2007). 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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