IMPACT OF FINANCIAL REFORMS ON THE LIQUIDITY OF THE NIGERIA STOCK MARKET

IMPACT OF FINANCIAL REFORMS ON THE LIQUIDITY OF THE NIGERIA STOCK MARKET

  • The Complete Research Material is averagely 52 pages long and it is in Ms Word Format, it has 1-5 Chapters.
  • Major Attributes are Abstract, All Chapters, Figures, Appendix, References.
  • Study Level: BTech, BSc, BEng, BA, HND, ND or NCE.
  • Full Access Fee: ₦6,000

Get the complete project » Instant Download Active

 

TABLE OF CONTENTS

Title page …………………………………………………………………………………………i 

Declaration ……………………………………………………………………….........................ii

Certification ………………………………………………………………………………...........iii

Dedication ………………………………………………………………………………………..iv

Acknowledgement ………………………………………………………………………………..v

Table of Contents ………………………………………………………………………………..vi

Abstract …………………………………………………………………………………………viii

CHAPTER ONE: INTRODUCTION

1.1              Background of the Study …………………………………………………………………1

1.2              Statement of the Problem …………………………………………………………………5

1.3              Objectives of the Study …………………………………………………………………...6

1.4              Research Hypothesis ……………………………………………………………………..6

1.5              Significance of the Study ………………………………………………………………...6

1.6              Scope of the Study …………………………………………………………………….…7

1.7              Definitions of Key Terms…………………………………………………………………7

CHAPTER TWO: LITERATURE REVIEW

2.1              Introduction ……………………………………………………………………………....8

2.2              Nature of Financial Reforms (Liberalization) …………………………………………....8

2.3              An Overview of the Nigerian Experience with Capital Market Reforms ………………..14

2.4              Measures of Capital Market Liquidity …………………………………………………..30

2.5              Empirical Studies of Financial Reforms on Liquidity …………………………………..32

2.6              Theoretical Framework …………………………………………………………………35

2.7              Summary ………………………………………………………………………………..39

CHAPTER THREE: RESEARCH METHODOLOGY

3.1              Introduction …..………………………………………………………………………….40

3.2              Research Designs ………………………………………………………………………..40

3.3              Population of the Study …………………………………………………………………40

3.4              Sample Size and Sampling Technique …………………………………………………...41

3.5              Methods of Data Collection ……………………………………………………………..41

3.6              Techniques of Data Analysis ……………………………………………………………41

3.7              Justification of the Methods and Techniques ……………………………........................42

CHAPTER FOUR: DATA PRESENTATION, ANALYSIS AND INTERPRETATION

4.1              Introduction ….……­…………………………………………………………………….44

4.2              Trend Analysis of Liquidity of the Nigerian  Stock Market for

the Period Under Review ……………………………………………………………......44

4.3              Hypothesis Testing ……………………………………………………………………...46

4.4              Discussion on findings ………………………………………………………………….48

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1              Summary ………………………………………………………………………………50

5.2              Conclusion …………………………………………………………………………….51

5.3              Recommendations …………………………………………………………………….51

References …………………………………………………………………………….52

Appendix ……………………………………………………………………………...60

ABSTRACT

There have been series of reforms in the Nigerian stock market since 1995 in order to enhance the liquidity of the market. The view to reforms the market is in conformity with the liberalists who argue that financial liberalization eradicates condition of financial repression in the financial sector and in turn makes the sector stand a better chance to grow and develop to appreciable levels than otherwise. The objective of this study, therefore, is to evaluate whether or not capital market reform has any significant impact on the liquidity of the market in sustaining economic growth. Data were collected through secondary sources from the Securities and Exchange Commission’s data bank and annual financial statements and the Nigerian Stock Exchange annual financial statements among others. Using paired t-test to analyse the data from 1990-2014, the study found that capital market reforms has significant positive impact on the liquidity of the Nigerian stock market. The study, among other things, recommended that the liquidity of the Nigerian stock market should be enhanced through encouragement of the effective participation of financial institutions.


 

CHAPTER ONE

INTRODUCTION

 

1.1              Background to the Study

 

In strengthening economic growth, an important fact is seen to be a healthy development of a nation’s financial sector, which in turns improves the private sector’s access to bank credit, equity capital and risk management services. Before the Structural Adjustment Programme (SAP) in 1986, there was extensive government control of the Nigerian financial system. For example, ceilings were imposed on bank interest rate; credit was allocated by administrative decisions rather than market criteria; and inflows of foreign capital were strictly controlled. By the SAP era in 1986, the government decided to introduce financial reforms in the financial system in which capital market reform is one of them. The reform, otherwise known as liberalization, in this work would be used to mean the same thing (interchangeably). The main aim of the reform is to improve capital market’s liquidity amongst others. Money market reforms commenced in 1987, with freeing interest rate, and the capital market reforms commenced as late as 1995 (Bakaert and Harvey, 2000).

A capital market is a place that handles the buying and selling of the securities. This is the ideal place where both the governments and companies can raise their funds. Capital market reform enables the capital markets to embrace new ideas and techniques affecting the capital market.

The reform is viewed from two main different categories: internal and external. Internal capital market liberalization is the easing of conditions for the participation of both firms and individual investors in the stock market by diluting or doing away with listing conditions, by providing freedom in pricing of new issues, by permitting greater freedoms to intermediaries, such as brokers, and by relaxing conditions with regards to borrowing against shares and investing borrowed funds in the market (Chandrasekhar, 2004). External reforms is a decision by a country’s government to allow foreigners to purchase shares in that country’s stock market (Henry, 2000). The focus of this study is on internal capital market reforms.

There exist two schools of thought on capital market reforms: the liberalists and the conservatives. Liberalists are the supporters of financial liberalization who believe that stock market liberalization in developing countries is equivalent to an Initial Public Offering (IPO) (Martell and Stulz, 2003) which boosts access to capital and allows for convergence of cost of capital between developed and developing countries. While conservatives believes that there are several conditions (such as strong institutions for monetary policy and exchange rate management pre-liberalization) not met by most developing countries which are necessary to ensure the success of full liberalization, in such economies it may lead to destabilization characterized by chronic phases of growth and capital flight.

Many studies, for instance in Austria and United Kingdom amongst others, (see Jones, 2003; Levine and Zervos, 1998; Stepleton and Subrahmanyan, 1997, Stulz, 1999a and 1999b; Wunnava et al., 2007) have shown that there are many benefits for governments that liberalized their Capital markets. Such benefits include; reduction in cost of equity capital (through integration of segmented markets, and integration is said to be achieved when global assets of identical risk command the same expected return regardless of where they are traded), capital gains appreciation, increase in investment, higher economic growth, and increase stock market liquidity (Jain – Chandra, 2002).

However, in Sub-Saharan Africa, it appears that the capital market did not enjoy the patronage of many interested participants in response to those expected gains because the extensive government control in the financial system. Thus, the performance of many developing countries’ stock markets, until the mid-1980s, generally suffered from the classical defects of bank dominated economics aggravated by shortage of equity capital, lack of liquidity of the stock markets, absence of foreign institutional investors, and lack of investor confidence in the stock market (Agarwal, 1997).

Furthermore, the level of market liquidity as a result of liberalization of financial system appear different from one country to the other. For instance in Nigeria, Emenuga (1998) in assessing the liquidity performance of Nigerian stock market found a turnover ratio, a measure of the value of shares traded relative to total market capitalization, to be 2% in 1996. The ratio is as high as 10% in Bostwana, 7.6% in Zimbabwe and 4.6% in Mauritius. The reason for the variation in the latter countries has been attributed to the open door investment policy.

The analysis of Yarty and Adjasi (2007) shows that stock markets have contributed to the financing of the growth of large corporation in certain African countries. In Ghana, the stock market financed about 12% of total asset growth of listed companies between 1995 – 2002 (Yarty and Adjasi, 2007). In South Africa, liabilities accounted for 61% total financing and retained earnings and external equity financed 21% and 18%, respectively of total assets growth between 1996 – 2000 (Glen and Singh, 2003). In Zimbabwe, external finance contributed 75.4% of total funds and internal finance provided the remaining 24.6% between 1999 – 1999. Equity financing was the most important source of long term finance at 7.8%. Long term bank loans and bonds were each a very minor component of total external financing (Mutenheri and Green, 2003). Globally, Glen and Singh (2003) find that liabilities accounted for 49% of total equity financing over the period 1996 – 2000. Of the remaining 51%, internal equity represented 29%, with external equity representing 22%. Glen and Singh (2003) also found substantial differences in the pattern across advanced and developing countries and across individual countries. They find that the use of liability to finance growth was much lower in emerging markets group, with that lower level offset by higher levels of both internal and external equity financing.

The issue of market size and its efficiency are also important as regard to financial liberalization. It is expected that liberalization would lead to an improvement in the quality and quantity of information available to market participants which invariably should enhance pricing by the market as per the Emerging Market Hypothesis (EMH). The EMH is based on the assumption that at any given time, prices of stocks fully reflect all the available information related to them. According to this, a stock market is seen as a more efficient if market relevant information is incorporated into assets prices (Subrahmanyan, 1997).

Since liquidity is one of the most important aspect of any vibrant capital market across the globe, this study aims at evaluating the Nigerian Capital Markets financial reform (capital market liberalization) policies in an attempt to enhancing its liquidity.  

1.2              Statement of the Problem

Nigerian capital market has been liberalized in 1995 in order to enhance the liquidity of the market. This is on the ground that liquid equity market allows savers to sell their shares easily if they so desire, thereby making shares relatively more attractive investments.

The view of liberalizing the market is in conformity with the liberalists who argue that financial liberalization eradicates condition of financial repression in the financial sector and in turn makes the sector stands a better chance to grow and develop to appreciable levels than otherwise.

However in the literature, there exists another conflicting view by the conservatives that financial liberalization as a strategy can only bring about veritable dividend to developed and stable economies. They assert that for liberalization to yield desired outcomes, certain conditions must be fulfilled; such as macroeconomic stability, fiscal discipline and matured tax system, amongst others. According to them, even if the conditions are fulfilled, instead of liberalization to stimulate economic growth by means of liquid market, it ends up hurting economic development by reducing investor commitment and incentives of stock owners to exert corporate control through monitoring the performance of managers and firms, and the overall outcome being eventual inefficiency.

As there is no unanimous agreement in the literature concerning the outcome of liberalization and also considering the maturity status of the Nigerian stock market, and the conditions argued by conservatives, empirical evaluation of Nigerian stock market to determine its liquidity becomes imperative.

  

1.3              Objectives of the Study

This study has a single objective: to evaluate whether or not capital market reform has any significant impact on the liquidity of the Nigerian stock market in sustaining effective economic growth

1.4              Research Hypothesis

In line with the objective of the study the following hypothesis has been formulated in Null form.

H0:       Capital market reform has no significant impact on the liquidity of the Nigerian stock market.

1.5              Significant of the Study

The study will add valuable knowledge to the existing literature in Nigeria. Our analysis contributes to the literature in two ways. First, using robust econometric procedure, it examines the case for financial liberalization in Nigeria. Second, it provides evidence on the implication of unfettered capital flows on the development needs of Nigeria which has been successful in attracting foreign capital as a result of liberalization efforts. The study is relevant because the twin policy target of capital flow attraction and liberalization have been the integral preoccupation of various governments of Nigeria since the International Monetary Fund (IMF) influenced structural adjustment programme of 1986. Issues of capital flows as well as stock market liberalization are of course not only of economic interest, but also clearly of serious policy concern.

In addition, this study will add more knowledge to those who want to expand their understanding of the activities of the capital market such as students, investors and international communities in the area of research, investment and comparative analysis.  

1.6              Scope of the Study

The study try to look at the impact of capital market reform on the liquidity of the Nigerian stock market for the periods of ten years, ranging from 1990 to 1994 (pre reform) and 2010 to 2014 (post reform). As there are many ways of looking at liquidity in the stock market, liquidity is measured based on the value of shares traded and market capitalization.

1.7              Definitions of Key Terms

Capital Market: Market where stocks are traded

Stock Market: Market where equity stocks are traded

Liquidity: The ability to trade stocks quickly.

Liberalization: Ability to trade stocks without stringent policies


You either get what you want or your money back. T&C Apply







You can find more project topics easily, just search

Quick Project Topic Search