IMPACT OF STOCK MARKET ON ECONOMY GROWTH IN NIGERIA
ABSTRACT: This study empirically investigates the impact of the stock market on economic growth in Nigeria. The study used secondary data covering the period of 1985 to 2017 and adopted ordinary least squares (OLS) regression analysis as the statistical tool to examine the impact of the stock market on economic growth in Nigeria. The finding of this study suggests that of the three stock market variables examined on the Real Gross Domestic Product, only market capitalization showed a positive and significant correlation on economic growth in Nigeria which agrees with Ewah et al (2009) who found that the stock market in Nigeria has the potentials for growth-inducing but has not contributed meaningfully to the economic growth of Nigeria due to low market capitalization, small market size, few listed companies, low volume of transactions, illiquidity, etc. Thus, the following recommendation including others was made that efforts should be made by the government to restore investors’ confidence to the market through right policy formulation, implementation, and evaluation which will portray transparency, fair trading transactions and dealing in the stock exchange, improve dealing in the market capitalization by encouraging more foreign investors to participate in the market and also to increase investments instruments.
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CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
The attainment of high sustainable economic growth has been the core objective of many nations. Thus, for sustainable growth to take place funds must be effectively and adequately mobilized and allocated to enable business and the economy to manage their human, material, and managerial resources for optimal output.
It is against this assertion that every nation has a financial system that serves as a mechanism for the mobilization and allocation of resources for the attainment of economic growth. The financial system of any country is the framework within which capital formation takes place. It facilitates the transfer of saved funds from surplus units (surplus-spending units) to the deficit units (deficit-spending units) of the economy through the intermediation of the financial institutions using the financial instruments with the aim of enhancing economic growth (Ezirim, 2005:169).
The financial system is made up of two major markets, the money market, and the capital. Elakama (2009), stated that the two markets are at the heart of the financial market. The capital market, on the other hand, is a type of market where long-term debt and equity instruments whose tenor exceeds a year are traded. Furthermore, Al-faki (2006) describe the capital market as a network of specialized financial institutions, series of mechanism, processes, and infrastructure that in various way facilitate the bringing together the supplier of medium to long-term capital for investment. Traded in the capital market includes equity, debts, bonds, right among others.
Within the broad classification of the capital market is the stock market which operates as the rallying point for the overall activities in the capital market (Alile, 1984 and Anao, 1984). It is the pivot around which every activity in the capital market is resolved. It follows therefore that without the facility provided by the stock market, it is doubtful if the capital market can effectively perform its expected role of resource mobilization talk more of allocating. It is in light of the above that the stock market is considered a vital element in the mobilization and allocation of resources in any modern economy.
Economist has recognized stock prices, capitalization rate, all shares, and value traded as one of the major factors that could derail the economy of any country, that is why the government positions the certain regulatory bodies to manage and control the capital market. The Security and Exchange Commission (SEC), Nigerian Stock Exchange (NSE) self-regulatory, among others are the regulatory body. Before now, traditionally, economists have attributed economic growth to the accumulation of human, Physical capital and the increase in productivity and creation of new goods arising from technological innovation (intensive growth). Traditional theorists believe that financial markets, in general, have no correlation with economic growth, as such factors such as capital, labor, and technology are considered the only factors which matter in the process of economic growth.
King (1993) and Levine (1993) among others have argued that the stock market spurs economic growth. On the other hand, Tsuru (2000) stressed that economic can be affected by functions exercise by the stock market. Ezeabisilli (2012) and Alajekwe (2012) noted that a liquid stock market offers the potential for investors to quickly and easily alter their portfolio thereby reducing the riskiness of their investment, thus fascinating investment in a project that is more profitable. Levine (2002) observed that a developed stock market reduces both liquidity shock and productivity shock of a businessman in the investment of funds as well as enhancing the capital of the economy, thereby leading to higher economic growth. The stock market offers access to a variety of financial instruments that enables economic agents, pool, price, and exchange. The stock market or equity market performs some functions that promote the growth of the economy. Firstly, as an economic institution, the stock market promotes efficiency in capital formation and allocation, Secondly, the stock market serves as a veritable tool in the mobilization and allocation savings among Competing used which are critical to the growth of the economy. Thirdly, it enables the government and industry to raise long-term funds for financing new projects and expanding and modernizing industrial and commercial firms, thereby increasing the quality of investment, among other numerous functions.
Therefore, considering the sensitive nature of this sub-market of the Nigerian capital market, it is important that this research is carried out so as to examine the empirical review of previous writers and taking a critical look at what is currently on the ground, with the prediction of what is likely to come, then draw a reasonable conclusion on the impact of the stock market on economic growth in Nigeria for the period under review.
1.2 Statement of the Problem
The impact of a developed stock market on the growth of the Nigerian economy cannot be overemphasized, Over the years the Nigerian stock market has experienced relative stability and recorded impressive growth. However, Ogwumike, (1997) and Omele (1997) noted when compared to other emerging and developed markets, it becomes evident that the Nigerian stock market is still relatively small in size and underdeveloped. For example, the comparison of the Nigerian Stock market in terms of numbers of listed equity. There are thousands of registered companies in Nigeria but only 172 is currently listed as in may 2018, Singapore has over 700 (established in 1979), Hongkong 2062 as of December 2017 (established in 1986 ) and Istanbul over 300 as at December 2016 (established in1986). Thus this indicates the relatively poor performance of the Nigerian stock market vis-à-vis those of its countries Although while the Nigerian stock market has been impressive as adjudged the number three[3] best performing in the world stock market, after recording a full-year average of 42.30% and closing 2017 with#4.3trillion in market capitalization. Currently, Nigerian equities recorded a net capital depreciation to the tune of ₦1.13 trillion between April and June 2018. This development, which represents about 7.77% average loss, is a sharp contrast to 8.53% gain in the first quarter of 2018 during which time equities gained ₦1.384 trillion. Unfortunately, about ₦1.15 trillion worth of loss was recorded by Nigerian equities in May, a huge deal compared to about ₦557 billion loss in the month of March and about ₦44 billion loss in April 2018. Still, Out of the 172 listed companies on the Nigerian bourse, the stocks of 63 quoted firms recorded no price movement as of December 27, 2017. According to data from the Securities and Exchange Commission, just four companies controlled over 60 percent of the equity market capitalization in 2016 with Dangote Cement Plc accounting for the lion’s share of 32.01 percent. The other companies were Nigerian Breweries Plc with 12.21 percent, Guaranty Trust Bank Plc 7.25 percent, and Nestle Nigeria Plc 6.71 percent. In 2017, market capitalization rose from N9.247tn on January 3 to N13.609tn on December 29, 2017, with Dangote Cement, GTBank, Nestle, Zenith Bank and Stanbic Bank as the top five. One would ask, how does the current composition of the listed equities reflect Nigeria’s GDP since important sectors such as agriculture, oil & gas and telecommunications are not proportionally represented. It is in the light of the above[ but not limited to these alone]that the researcher tends to assert that while the growth of the stock market has been impressive, the same cannot be said of the growth of the Nigerian economy. Hence this study aims to evaluate the impact of stock market development on Nigeria’s GDP.
1.3 Objectives of the Study
The main objective of the study is to examine the role of the Nigerian stock market in the Nigerian economy. The work will specifically achieve the following objectives:
- To determine the impact of market capitalization on Gross Domestic Product (GDP)
- To examine the effects of all share index on Gross Domestic Product (GDP)
- To evaluate the effect of the value of the transaction on Gross Domestic Product (GDP)
1.4 Research Questions
The research was guided by the following questions:
- To what extent does market capitalization impact GDP in Nigeria?
- To what extent does all share index impact the GDP in Nigeria?
- What is the impact of the value of the transaction on GDP in Nigeria?
1.5 Research Hypotheses
In line with the purpose of the study, the null hypotheses have been formulated based on the following assumptions:
HO1: There is no significant relationship between market capitalization and GDP in Nigeria
HO2: There is no significant relationship between all share index and GDP in Nigeria
HO3: There is no significant relationship between the value of transaction and GDP in Nigeria.
1.6 Significance of the Study
The significance of an efficient and well-functioning stock market in spurring economic growth has been well emphasized in the literature. Therefore, a constructive and objective study of the stock market which aims at highlighting its role in the process of capital formation and national development will be of great importance both to individual investors, firms and policymakers.
As a market place where securities (Stocks, shares) are bought and sold openly with relative ease, the stock exchange is very important to investors. Hence, prospective shareholders and investors would find the work relevant as the research study focuses on the Nigerian Stock Exchange where activities of the stock market are usually carried out. Furthermore, since the stock market is a reliable means through which firms can source for low equity capital, as well as the fact that the prices of the stocks of firms quoted on the stock exchange serves as an indication of the overall performance of the firm, this research study will also be of great significance to firms. Additionally, this research will be relevant to the government as it will enable it to have a better knowledge of the policies necessary to enhance or improve the contribution of the stock market to the economy.
Lastly, it will also help future researchers who might want to take up further research in this field, thus adding to the available literature for future research work.
1.7 Definition of Terms
Stock market: The stock market is a subset of the Nigerian capital market. It is a secondary market were long-term securities are traded. Traded in the stock market is equity (shares) only.
Gross Domestic Product: It measures the economic production of a particular territory in financial terms over a specific period of time.
All Share Index: It is a very important index that is used to measure the performance of the Nigerian Stock Market.
Market Capitalization: It is the total market value of equity. This index is used to measure the performance of the stock market. It indicates the prevailing value of all the listed security in the market.
Total Listed Company: It shows the total number of companies whose stock has been quoted in the stock exchange.
Value Traded: It measures the total amount of security traded.
1.8 Limitations of the Study
The economy is a large system with lots of diverse and complex part; the research work focuses only on the stock market as a subset of the capital market and its activities as it impacts the Nigerian economic growth. The study covers activities of the Nigerian stock market for a period of 32 years, from 1985 to 2017. The choice of this period is anchored on the fact that it covers both the relatively small and high activities of the market.
This research was limited by certain constraints which include difficulty in sourcing data from certain relevant organizations, non-availability of data on certain variables, restrictions on accessing certain materials on the internet.
1.9 Organization of the Study
The entire research work is organized into five chapters.
Chapter One is the introductory part of the study and is composed of the Background to the study, Statement of the problem, objectives of the study, research questions, research hypotheses, significance of the study, definition of terms, limitations of the study, organization of the study.
Chapter Two covers the literature review. The researcher made an attempt to explore what previous researchers have done on the subject matter.
Chapter Three examines the researcher methodology; it covers the research design population, sampling produces, data collection method, model specification, statistical tools, decision model (data analysis techniques).
Chapter Four considers the data presentation analysis and interpretation.
Chapter Five is concerned with the summary, conclusion, and commendation of the usefulness of the study.
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