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. The efficiency of the stock market is measured
using a number of well- known empirical tests. The results indicate that the
stock market indeed contributes to economic growth as all variables conformed
to expectations with R2 as 0.96 and adjusted R2 as 0.956.
There is also considerable scope for potential gain to the Nigerian investor
who is willing to diversify across industries. Expansion and efficiency of the
Nigerian Stock Market would also be realizable if the recommendations in this
project are considered.
TABLE OF CONTENTS
Certification
……………………………………………………………………………….i
Dedication
………………………………………………………………………………...ii
Acknowledgement ……………………………………………………………………….iii
List of Tables
Table of Contents
………………………………………………………………………...iv
Abstract …………………………………………………………………………………vii
CHAPTER ONE Introduction
1.1 Background
of the Study ……………………………………………………………1
1.2 Statement
of the Problem ……………………………………………………………..5
1.3 Scope
of the Study
……...……………………………………………………………5
1.4 Objectives
of the Study
……………………..……………………………………….6
1.5 Justification
of the Study ……………………………………………………………..6
1.6 Research
Questions
………………………………………………………………….7
1.7 Research Hypothesis ………………………………………………………………....7
1.8Research Methodology ……………………………………………………………….8
1.9 Sources
of Data ………………………………………………………………………8
1.10
Structure of the Study …………………………………………………………....8
1.11
Definition of Terms
……………………………………………………………..9
CHAPTER TWO Literature Review
2.1 Introduction to Capital Market
……………………………………………………..12
2.2 Brief History of Nigerian Stock
Market …………………………………………….13
2.3 How to Get Listed on the Stock
Market …………………………………………… 15
2.4 Review of Development in the
Nigerian Stock Market ……………………………. 16
2.5 Operations of the Nigerian
Stock Market ………………………………………….. 18
2.6 Stock Market Legislations
…………………………………………………………. 21
2.7 Contribution of Stock Market to
the Nigerian Economy ………………………….. 22
2.8 Importance of Stock Market to
an Economy ……………………………………… 24
2.9 Constituencies of Nigerian
Stock Market …………………………………………. 27
CHAPTER THREE Research Methodology
3.1 Introduction
………………………………………………………………………… 29
3.2 Theoretical Framework ……………………………………………………………..
29
3.3 Nature of Research Method
………………………………………………………... 31
3.4 Research Design
……………………………………………………………………. 31
3.4.1 Model Specification
……………………………………………………………... 31
3.4.2. Data
Sources………………………………………………………………………33
CHAPTER FOUR Model Estimation and Results
4.1 Introduction
………………………………………………………………………….34
4.2 Presentation of Data
…………………………………………………………………36
4.3 Data Analysis and Results
…………………………………………………………..36
4.4 Testing of Hypothesis and
Discussion of Results …………………………………...37
CHAPTER FIVE Summary, Conclusion, and Recommendations
5.1 Summaries
…………………………………………………………………………...39
5.2 Findings
……………………………………………………………………………..40
5.3 Recommendations
…………………………………………………………………..40
5.4 Conclusions
…………………………………………………………………………42
5.4.1 Limitations of Study
………………………………………………………………42
5.4.2 Suggestions for Further
Studies …………………………………………………...42
Reference
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
etc, while equity securities mainly concern ordinary stocks which impose higher
liabilities on the holders. Portfolio investment in the capital market 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:
- 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 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 ownership 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 whole.
Economic growth encompasses a
sustained rise in the productive capacity of any economy and real output per
capita as a basis for sustained improvements in the living standards and
quality of life of the entire population over a period of time. A build up of
productive capacity is a necessary pre- requisite for growth. It is this
capacity that determines the level of output of goods and services in the
economy. Investment is said to represents net increase in an economy’s capital
stock, and it leads to growth. If this is so, then it can be said that there is
a relationship between capital accumulation and economic growth.
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, this study attempts to answer the following:
- Does the market capitalization have a positive effect
on GDP?
- Does growth rate of per capita income have a positive
effect on GDP?
- What are the effects exchange rates on GDP?
1.3 SCOPE OF THE STUDY
In an attempt to analyze the role
of the stock market in the Nigerian economy, the data covering the period of
study is between 1975- 2004 i.e. a period of thirty (30) years. The reason
being that, a study period this long will, probably, reduce any form of bias in
the results of estimates.
1.4 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 other objectives
include:
- to determine if the stock market can lead to economic
growth by boosting international investment climate;
- to evaluate major determinants of investment in stock
market;
- to find out if the stock market, in growing the
Nigerian economy, relates to the privatization exercise;
- to find out the major problems of the stock market;
- to find out the measures that have been put in place
to enhance the efficiency of the stock market;
- to make constructive recommendations on how to
increase stock market efficiency, hence, economic growth
1.5 JUSTIFICATION 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.
Several interactive studies have
revealed the positive role the stock market plays in leading an economy to
growth, which is a prerequisite for development. For instance, Demirguc- Kunt
and Levine (1993) have observed that increased flow of funds to the domestic
economy as international capital responds to the thriving stock market is one
of the gains accruable.
In view of the above facts, the
need arises to study how developed the Nigerian Stock market is and the role it
plays in leading this economy to growth, hence development. It is expected that
this study will attempt to make some contributions along this line spelt out of
the aforementioned.
1.6 RESEARCH QUESTIONS
. In the light of the research
problems, this study attempts to answer the following:
1.
Does the market capitalization have a positive effect on GDP?
2.
Does growth rate of per capita income have a positive
effect on GDP?
3.
What are the effects exchange rates on GDP?
1.7 HYPOTHESIS OF THE
STUDY
H0: there is a negative
relationship between market capitalization ratio and GDP
H1: there is a positive
relationship between market capitalization ratio and GDP
H0: there is a negative
relationship between investment and GDP
H1: there is a positive
relationship between investment and GDP
1.8 RESEARCH
METHODOLOGY
To carry out an econometric
analysis of the study, the Ordinary Least Square (OLS) estimating techniques
will be used because it possesses a unique property of Best Linear Unbiased
Estimator (BLUE) when compared to other estimating techniques. The OLS method
also possesses the desirable properties of un-biasness, consistency, and
efficiency.
1.9 SOURCES OF DATA
Data used in this research project
are secondary data. The data used were gotten form authentic sources, some of
which are listed below:
i.
The Nigerian Stock Exchange
-
Nigerian Stock Exchange fact book;
-
Nigerian Stock Market annual;
-
Publications and journals from reputable scholars;
ii.
Statistical Bulletin of the Central Bank of Nigeria
iii.
National Bureau of statistics
1.10 STRUCTURE OF THE STUDY
The structure of the study includes
five chapters, each chapter deals with different aspects of the study.
Chapter one is basically an introductory
chapter, it includes the background of the study ,statement of problem , objectives of the study, justification of
study, objective of the study , research hypothesis , scope of the study.
Chapter two deals with theoretical
framework as well as the literature review of relevant literatures on the role
of stock markets in growing Nigeria’s
economy. This chapter also considers the history and the development of Nigeria’s stock market
over the years.
In Chapter three we considered the
research methodology. In this chapter the model that captured the relationship
between economic growth and the stock market was specified and estimated .It
also defines relevant variables used in study.
Chapter four also
includes analysis and presentation of the results of our estimated model.
Chapter five
summarizes the major findings emerging in this study.
1.11 DEFINITION OF TERMS
Prospectus: Any notice, circular advertisement or any document
which offers to the public for subscription or purchase, any shares or
debenture of a company and includes a document which saves to the extent that
it offers for securities for a consideration other than cash.
It is also a legal document issued
when raising finance for a public company through a share issue, the content of
which are subject to strict regulation.
Equity: The residual right of ownership over the asset of a
company. It is a right that can be enforced only when everyone else has been
paid. Specifically, the ordinary shares of a company.
Central Security Clearing System (CSCS): A computerized system of
trading stock at the stock exchange. It makes the market most efficient, very
transparent, fair, and simple.
Insider Dealing: Illegal dealings
in shares by person with knowledge obtained from his position in the company.
Bears: Are value or long term investors.
Bulls: Speculative or short term profit takers.
Issuing houses: Are mainly stock broking firms. It describes the
corporate finance activity of merchant banks and stockbrokers. Members of the
exchange need expertise to act as issuing houses, while companies need to be
dealing members of the Nigerian stock exchange to become stockbrokers.
Market Capitalization: A firm’s value as determined by the market
price of its issued and outstanding common stock.
Automated Trading System (ATS): It is a system whereby the Nigerian
Stock Exchange operates with dealers’ trading through a network of computers
connected to a server. The automated trading system (ATS) has facilities for
remote trading and surveillance. The exchange is in the process of connecting
with dealers to commence trading from their offices or any part of the world.
Primary Market: It is a market where entirely new shares are
offered for the first time. The modes of offer include:
-
right issues
-
offer for
subscription
-
offer for sale
-
private
placements
Secondary Market: It is a market where existing securities are
traded after their issuance in primary markets. In this case, over the counter
market and organization market are available to rapid liquidity to investors.
Securities traded here include:
-
preference shares
-
debenture stocks
-
federal government development stocks
-
state and local government bonds and equities
Only licensed stock brokers of the stock
exchange are allowed to transact business i.e. buy and sell shares on behalf of
their customers.
Derivative Market: this market is still
at the infant stage. It does not trade in issued securities but on the basis of
future title to the security. Right offer is, probably, the only derivative
being actively traded on the floor of the exchange. However, global depository
receipts have been issued.
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