Full Project-THE EFFECT OF MACROECONOMIC VARIABLES ON SHARE PRICE MOVEMENT IN NIGERIA: A CASE OF NON FINANCIAL QUOTED COMPANIES (1984 – 2005)

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CHAPTER ONE
INTRODUCTION
1.1  BACKGROUND OF THE STUDY
In an emerging and competitive economy like Nigeria, the decision to invest is taken because of the apparent or perceived benefits, which the investor hopes to get. Investment in securities is therefore primarily for the purpose of earning income, which could be in form of dividend, profit or/and capital gains. Though some other reason such as prestige, power and control also be adduced but the primary motive to earns some form of return. This investment in securities is carried out through a market called the stock exchange. Alile (1991) suggest that the stock exchange is the hallmark of the of the capital market. While Osaze (1991) defines that the stock exchange “basically as a market where buyers and sellers of securities operate through brokers to eect transaction in securities that have been admitted for listing on the exchange”. Famnia (1970) “theory of eicient market hypotheses suggests that stock markets are eicient because they reflect the fundamental macroeconomic behaviour. This eiciency implies that a financial market incorporates all relevant information (including macro-economic fundamentals) in the market, in which the outcome is the best possible under the circumstances. Ibru (2000) said “it helps in the mobilization of domestic and foreign savings for productive investment which is vital for capital formation for economic growth and development. It’s also assists in transmitting information on share price and trading volume to the public (Olowe, 1997). Like other markets, stock exchange facilities communication is between buyers and sellers. According to Osaze (1991), securities traded in the capital market can be categorized into fixed securities, variable income securities and others. Ibru (2000) puts it specifically to include ordinary share, preference share, debenture or cooperate bond, gis and state government bond.
This study will concentrate on the variable income securities with emphasis on common stock, which is the major type of income securities. Besides the various activities in the stock exchange as depicted by the movement and behaviour of stock price and volume of trading recorded is a measure of performance of the economy. The stock exchange as a market shows the price of securities fluctuating daily as can be seen from daily official list of the exchange although this fluctuation is not peculiar to Nigeria. A tremendous surge in price of stock has been accompanied by large daily fluctuation and historically high trading volume, so it is not surprising that such activities have generated new interest in the question of what are the bases for these movements in the stock prices. The reasons behind movement of prices have been subject to many research works though there has been consensus as to what accounts or determines this movement. However, Omolehinwa (2001) said, it may be caused by company’s sensitivity to general economic factors (systematic note), information organize through efficient and determine way, or factors specific to the company (unsystematic note), information not organize through efficient and determine way. Also, Osaze (1991) identified three categories of factors as fundamental factors, technical factors, and eicient market hypothesis. The fundamental factors are further categorized into company related, industry related, political, volume of trading, earnings and dividend. Therefore it makes sense, that to make money in stock market, we need to understand what causes price to change. By having appreciation for things that motivate stock price changes we can be better at anticipating the direction and velocity of price moves (Stocks-core.com (http://Stocks-core.com), 2002). Having said all these, it is obvious that the economic environment, which a company operates affects it, hence economic related factors will be examined.
1.2  STATEMENT OF THE PROBLEM
The role of capital market in the growth and development of any economy cannot be over emphasized. Its performance at any given time-shares a level of growth in the economy. A look at the daily official list of Nigerian stock exchange reveals that share prices of various companies assumed upward/downward trend. Going by the assumption in financial analysis that the objective of a firm is to maximize the shareholder’s wealth then the reasons for this, movement should be of concern hence this study will look at the effect of the macroeconomic variables (Interest rate, inflation rate, exchange rate and gross domestic product (GDP) growth rate) on share prices. To be more specific, answers to the following question are sought: What is the reason for this share price movement? Do macroeconomic variables affect share prices? Is there any relationship between macroeconomic variables and share prices?
1.3  AIMS AND OBJECTIVES OF THE STUDY
The aim of this research is to analyze the impact of macro economic variables on the prices of shares in stock market. The objectives of this research includes the following:
To highlight the cause not share price shi.
To find out their relationship between macroeconomic variables and share price.
To find the degree at dependence of share prices.
1.4  RESEARCH HYPOTHESES
The following hypotheses are to be tested in this study: Interest rate affects share price in Nigerian stock exchange. Inflation rate affects share prices in Nigerian stock exchange. Exchange rate affects share prices in Nigerian stock exchange. Gross domestic product 9GDP) growth rate affects share prices in Nigerian stock exchange.
1.5  SCOPE OF THE  STUDY
Nigerian stock exchange is the only capital market in Nigeria where securities are traded. This study will focus on the ordinary share prices of companies listed on the stock exchange. The period of study shall be between 1980 – 2005 (26 years). Many companies are listed on the stock exchange and in different sector (e.g. conglomerate, brewery, food and beverage etc.).
1.6  SIGNIFICANCE OF STUDY
Majority of studies done on share prices behaviour have been on company related factors like dividend policy, earnings, price earning ratio etc, since Nigerian economy is becoming more deregulated and with more companies being listed on the floor of the exchange, also with public awareness of activities, going on in the capital market, it becomes more imperative that this study be carried out to contribute to the existing knowledge or share price behaviour. Besides, it will aid management of Nigeria publicity quoted companies in hedging against any risk that might emanate from these macroeconomic variables.
1.7  LIMITATION OF THE STUDY
The major limitation of this study is the smallness of sample size, time period, under investigation and of course, the availability of data. All these were as a result of finance and time factor.
1.8  DEFINITION OF TERMS
Shares: These are equities listed on Nigerian stock exchange. These shares belong to the actual owners of the companies who assume the ultimate risk and are entitled to dividend after all other interest have been satisfied.
Capital Market: This is a market for long-term securities. It is made up of a network of financial institution that brings together suppliers and users of funds in the financial intermediation.
Price: Price refers to the market price of the common stock as determined at the dealing session. It could also be referred to as quotation.
Nigerian Stock Exchange: This is a non-profit making organization primarily responsible for supporting the capital raising process by providing the best quality, most efficient and cost effective market place for the trading of financial instruments.
Quoted Companies: These are public liability companies whose securities are listed on the Nigerian Stock Exchange.
Securities: As used in this study, securities are refers to equities, popularly referred to as ordinary shares.

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