Full Project -IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA (1983-2010)

IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA (1983-2010)

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 CHAPTER ONE

INTRODUCTION

1.1           Background to the study

Mobilization of resources for national development has been the central focus of development economists. As a result, the centrality of savings and investment in economic growth has been given considerable attention in the literature. Financial markets, especially stock market have grown considerable in developed and developing countries over the last two decades. As economies develop, more funds are needed to meet the rapid expansion. Thus, stock market serves as a veritable tool in mobilizing and allocating savings among competing uses which are critical to the growth and efficiency of the economy (Alile 1984).

The determination of the overall growth of an economy depends on how efficient the stock market performs its allocative functions of capital. As the stock market mobilizes savings concurrently, it allocates a large proportion of it to the firms with relatively high prospect as indicated by its rate of returns and level of risk.

 

The importance of this function is that capital resources are channeled by the mechanism of the force of demand and supply to those firms with relatively high and rapidly increasing productivity, thus, enhancing economic expansion and growth (Alile 1997). Mobilization of resources for national development has long been the central focus of development economists. The stock market is an economic institution, which promotes efficiency in capital formation and allocation. The stock market enables governments and industry to raise long-term capital for financing new projects, and expanding and modernizing industrial/commercial concerns. If capital resources are not provided to those economic areas, especially industries where demand is growing and which are capable of increasing production and productivity, the rate of expansion of the economy often suffers. A unique benefit of the stock market to corporate entities is the provision of long-term, non-debt financial capital. Through the issuance of equity securities, companies acquire perpetual capital for development. Through the provision of equity capital, the market also enables companies to avoid overreliance on debt financing, thus improving corporate debt-to-equity ratio (Olowe, Oluwatoyin and Fasina, 2011).

 

In recent times there was a growing concern on the role of stock market in economic growth. The stock market is in the focus of the economist and policy makers because of the perceived benefits it provides for the economy. The stock market provides the fulcrum forcapital market activities and it is often cited as a barometer of business direction. An active stock market may be relied upon to measure changes in the general economic activities using the stock market index (Babatunde and Mokuola, 2005).

 

The stock market is viewed as a complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the economy comprising households, firms, and government are mobilized, harnessed and made available to various sectors of the economy. The development of the capital market, and apparently the stock market, provides opportunities for greater funds mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal (Atje and Jovanovic, 1993).

 

Economic growth in a modern economy hinges on an efficient stock market.Stock market contributes to economic growth through the specific services it performs either directly or indirectly. Notable among the functions of the stock market are mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness of these functions, through prompt delivery of their services can augment the rate of economic growth (Bencivenga, Smith & Starr, 1996).

 

The stock market is a market which deals in long term loans (Becsi & Wang, 1997). It supplies firms with fixed and working capital and finance medium term and long term borrowings of the federal, states and local governments. Thus, the stock market encompasses of institutions and mechanisms through which medium term funds and long term funds are pooled and made available to corporate entities and governments. The stock market has been recognised as an institution that contributes to the socio-economic growth and development of emerging and developed economies. Bossone (2000) noted that this is made possible through some vital roles played, such as channelling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy. Levine (1991) suggested that stock market activities spurs economic growth basically in two ways. First, stock markets make property changes possible in the companies, whilst not affecting their productive process. Second, stock markets offer higher possibilities of portfolio diversification to the agents.

 

Dealers in the securities segment of the stock market include banking institutions, stockbrokers, investment and merchant bankers and venture capitalists that intermediate between the market and the public. Well functioning financial markets are very crucial for the promotion of global financial integration. An efficiently functioning domestic financial market can better position a country’s competitiveness in the markets for global capital (Bouzid, 2012).

Accessing global markets for capital, through a well-functioning financial system, lessens a country’s reliance on foreign aid and other forms of external borrowing. It has been pointed out by a number of financial analysts that financial globalization allows for the sharing of local security risks.

 

Given the benefits associated with having well-functioning financial systems, a number of African countries have endeavored to put in place various measures aimed at developing the financial sector. Financial sector reforms have therefore been widely used as policy measures to encourage the development of domestic financial systems as well as the dismantling of barriers to international capital flows. African financial markets have been increasingly integrated with the other world stock markets. The encouraging drive towards globalizing capital flows in Africa has led to the growing relevance of emerging stock markets in the continent (Harris, 1997).

 

The impact of the stock market development is determined by a number of elements, which include how financial assets are priced, such as the size of the stock market, market capitalization, number of listed equities, transactions in buying and selling of securities (liquidity) which in this case refers to the volume of transactions and new issues of securities.

This study therefore poses to examine the impact of stock market development on economic growth in Nigeria (Boyd and Prescott, 1986).

 

1.2           Statement of the Problem

Nigerian stock market has undergone a series of reforms all with the hope of creating a stable economic growth and development. The most recent reform was carried out in order to provide opportunities for greater fund mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal. It is expected as a result of the reform the market can provides variety of financial instruments capable of enabling economic agents to pool, price and exchange risk. In spite of these vital roles that the reform is expected to play, there is however a great concern on the development of the Nigerian stock market in relation to the economic growth and development which when viewed from the nature of activities taking place in the market appeared superficial.  This may probably be attributed to lack of providing enabling framework that sustained confidence and investors’ protection and also thorough evaluation of factors that are of significance relevance in determining stock market development.

 

Although from economic perspective distinction exists between economic growth and development, most of the studies conducted in the area under study fail to take into consideration the difference and also the interrelationship between the two variables. This therefore triggers the need to investigate the situation bearing in mind the distinction and also appropriateness of the methodology under study. To the best of our knowledge, studies conducted in the area show mixed conflicting results and this could probably be attributed to failure to adopt appropriate methodology. Another issue of concern is most of the studies that evaluate stock market development are either on data of primary market or secondary market and used to infer on the overall stock market development but not on the combination of the two markets’ data in aggregate. This informs the need to evaluate the market on aggregate data basis in order to ascertain how influential it is on the economic growth of Nigeria.

1.3   Objectives of the study

The main objective of the study is to examine the impact of stock market development on economic growth in Nigeria. However the specific objectives

are to:

  1. Determine the impact of size of the market on the Gross Domestic Product (GDP).
  2. Assess the effect of total new issues on the gross domestic product.
  • Identify the contribution of the volume of transaction to the gross domestic product in Nigeria.
  1. Examine the impact of total listed equities stocks on the gross domestic product in Nigeria.
  2. Find the effect of interest rate on gross domestic product
  3. Examine the impact of inflation rate on gross domestic product
  • Identify the effect of financial deepening on gross domestic product

 

 

1.4          Research Questions

Based on the broad statement of the problem the following research questions were raised:

  1. To what extent does market capitalization impact on gross domestic product?
  2. How does total new issues affect gross domestic product in Nigeria?
  • To what extent does the volume of transaction in the stock market contribute to the Gross Domestic Product in Nigeria?
  1. To what extent does total listed equity in the stock market contribute to the Gross Domestic Product in Nigeria?
  2. To what extent does interest rate affect gross domestic product?
  3. To what extent does inflation rate impact gross domestic product
  4. To what extent does financial deepening affect gross domestic product?

 1.5           Hypothesis of the Study

In order to capture the stated objectives of this study the following hypotheses stated  in null form:

H01: Size of the market has no significant impact on Nigeria’s gross domestic product.
H02: Total new issues have no significant effect on Nigeria’s gross domestic product.
H03: Volume of transaction has not significantly affected Nigeria’s gross domestic product.
H04: Total listed equities have no significant impact on Nigeria’s gross domestic product
H05: Interest rate have no significant effect on Nigeria’s gross domestic product

H06:           Inflation rate have no significant impact on Nigeria’s gross domestic product

       H07:      Financial deepening has not significantly affected Nigeria’s gross domestic                           product.

These Seven stated hypotheses is captured by the general hypothesis which is:

Ho: Stock market development has no significant effect on economic growth of Nigeria.

                                                                                               

1.6  Significance of the study

It is a noted fact that for any meaningful economic transformation of a country to take place, the stock market must be effectively active. It has also been an acknowledged fact that the economic strength of any nation is measured according to how actively and effectively the stock market is performing (Adamu, 2008).

The study will be of immense significance to regulatory authorities such as the CBN and SEC in coming up with sound financial policies and reforms that will boost the development of the stock market. This would strengthen public companies by ensuring that corporate governance practices in Nigerian public companies are aligned with international best practices through improved financial disclosure of information and adoption of International Financial Report Standards. Finally, future studies may want to share this experience by extrapolating some of the data as well as the statistical inferences that this study has come up with.

1.7          Scope of the study

The Nigerian economy is a large component with a lot of diverse and sometimes complex parts. In this regard the study looks at a particular part of the economy by focusing particularly on the financial sector. Even then, the study does not cover all the parts of the financial sector, but focuses only on the stock market and its activities as such its impact on Nigerian economic growth. This is informed by the importance of the stock market to the economic development of the country because it provides long term funds needed for investment for the growth of the economy.

 

The choice of the period of study, 1983-2010 is predicted on the reasoning that, the market has experienced remarkable developmental changes as well as improvement in the policy framework of the market. This is in terms of its operational activities, increase in the number of quoted companies and securities, as well as market capitalization. Although, new issues and volume of transactions have all recorded significant increase during the period of study but there have been records of downturn in some years as a result of the global

financial crisis.

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