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ABSTRACT
A major engine of economic growth and development of any nation is the stock market. It impacts positively on the economy by providing financial resources through its intermediation process for financing long term projects. These projects could be promoted by governments or private institutions. The analysis scope covered a period of twenty-five years spanning from 1986-2010. The econometric methodology adopted is the Ordinary Least square method (OLS). Using the independent variables of market capitalization, value of trade, inflation rate and exchange rate and the dependent variable of gross domestic product, this study analyzes the impact of the stock market on the Nigerian economy. In conclusion, the result shows that the stock market has a highly significant impact on the Nigerian economy. Hence, without an efficient stock market, the economy may be starved of the required long term funds for sustainable growth and development.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND OF THE STUDY
The stock market is supposed to play an important role in the economy in
the sense that it mobilizes domestic resources and channels them to
productive investments. However, to perform this role it must have
significant relationship with the economy.
The development of stock market in Nigeria, as in other developing
countries has been induced by the government. Though prior to the
establishment of stock market in Nigeria, there existed some less formal
market arrangement for the operations of the stock market. It was not
prominent until the visit of Mr. J.B. Lobynesion in 1959, on the
invitation of the federal government, to advice on the role the central
bank could play in the development of the local money and stock market.
As a follow-up to this, the government commissioned and set up a Barback
committee to study and make recommendations on the ways and means of
establishing a stock market in Nigeria as a formal market. (Alile and
Anao 1990) Capital markets are key elements of a modern market-based
economic system as they serve as the channel for flow of resources from
the SAVERS of capital to the BORROWERS of capital. Efficient capital
markets are hence essential for economic growth and prosperity. With
growing globalization of economies, the international capital markets
are also becoming increasingly integrated. While such integration is
positive for global economic growth, the downside risk is the contagion
effect of financial crisis especially if itsorigin lies in the bigger
markets.
As for the effect of macroeconomic variables such as money supply and
interest rate on stock prices, the efficient market hypothesis suggests
that competition among the profit maximizing investor’s impact of
macroeconomics. Variables on stock market will ensure that all the
relevant information currently known about changes in macroeconomics
variables are fully reflected in current stock market, so thatinvestors
will not be able to earn abnormal profit through prediction of the
future stock markets investments. (Chong and Koh 2008).
Therefore, since investment advisors would not be able to help investors
earn above average returns consistently except through access to
employer insider information.
Stock market is a critical log in the wheel that smoothens the transfer
of funds for economic growth. Broadly speaking, stock exchanges are
expected to accelerate economic growth by increasing liquidity of
financial assets, making global diversification easier for investors and
promoting wiser investment decisions. In principle, a well functioning
stock market may help the economic growth and development process in an
economy through growth of savings, efficient allocation of investment
resources and alluring of foreign portfolio investments. The stock
market encourages savings by providing the household having investable
funds, an additional financial instruments which meets their risk
preferences and liquidity needs better, it in fact provides individuals
with relatively liquid means for risk sharing in investments
projects.(Agrawalla 2006).
The stock markets capacity to contribute to the development of the
economy has been largely impaired by various inadequacies. The market
over the years have been characterized by-Lack of depth with few
securities-poor liquidity, partly due to inefficiency-Poor
infrastructural for secondary market operations-Basically, an equity
market with largely dormant bond market-High transaction costs-Lack of
sophisticated product investments and instruments. The market is mainly
dominated by traditional instruments such as BONDS and EQUITIES with
limited derivatives-Unfavorable tax regime-Unstable and largely in
appropriatein macro-economic environment.
1.2 STATEMENT OF THE PROBLEM
In Nigeria, the capital markets have over the years been performing its
traditional role. However, its efficiency and effectiveness in this
regard have been greatly limited by various factors notable among which
are price level and the structure of the economy, which is dominated by
oil production, yet, the oil producing companies are listed on the stock
market, the lack of long term capital in the business, the business
sector depends mainly on short-term financing such as overdrafts to
finance even long term-capital. The economic reforms of the federal
government particularly those that have taken place in the financial
sector are therefore intended among other objectives to attain. The
focus of this paper is to examine stock market and it’s impact on the
Nigerian economy.
As a result of the above, the market has therefore not been in the best
position to contribute maximally to economic growth and the real sector.
These inadequacies have made the reforms that have taken place over the
years imperative. Recent reforms in stock market with the enactments of
the Investments and SecurityAct (ISA) no 45 of 1999 which replaced the
SEC degree of 1986. Other reformsthat have been taken place in the stock
market include:
-Review of minimum capital requirement for operators.
-Reduction of transaction costs.
-Introduction of code of corporate governance.
-Reactivation of the Bond market.
-Introduction of market makers.
-Introduction of self registration.
-Development of a commodity market.
Many emerging stock markets are being restricted by lot complaints which
impede the realization of capital market serving as a catalyst for
economic growth. Such problems include:
A.Unquoted companies: Many companies are not quoted because of perceived
loss of control. They are afraid of sharing the ownership of the
company with others and because of this reason they prefer to restrict
themselves to funds provided by family members and friends and are
therefore unable to unanticipated challenges in a timely manner.
B. Domination of public sector: The dominance of public sector like
government s has greatly hindered the capital market growth as many them
are yet to be privatized(especially the public utilities)that can
deepen the market almost immediately.
C. A lot of sharp practices exist in the flow of the exchange fostering
improper disclosure of information, unfairpricing, insider dealings
e.t.c
Currently, the performance of the Nigerian stock market during the last
month rallied 118 points or 7.3%. from 2013, the Nigerian stock market
average 1106 index points reaching an all time-high of 1718 index point
in may 2013 and a record of 848 index points (NSE 30). This rise and
fall of the Nigerian stock market index point has resulted in the slow
meltdown of the capital market. This meltdown of the capital market
could result in unbalances on the economy.
According to the NSE report the process of this rise and fall began in
January 2007 as the capital market nose-dived from all time high of
₦13.5 trillion to less than ₦4.6 trillion by the second week of January.
The all share index has also plummeted from abroad 66,000 basis points
to less than 22,000 points in the same period. It has also experienced a
free for all downward movement with more than 60% of 300 quoted stocks.
Consequently, many of the quoted stocks lack liquidity as their holders
are trapped, not able to convert to cash to meet their domestic needs
thereby creating a major problem. When this occurs, stockholders begin
to withdraw and foreign investments are lost and this results to a
negative developmenton the Nigerian economy.
1.3 OBJECTIVES OF THE STUDY
The central objective of this study is to analyze the economic impact of
stock market on Nigerian economy. The specific objectives include;
1. To examine the relationship between stock market and Nigeria’sgross domestic product.
2. To assess the level of stock market stability in Nigeria.
3. To appraise the performance of the Nigerian stock market.
4. To make policy recommendations at the end of this study.
1.4 RESEARCH HYPOTHESIS
The research work is guided by the following hypothesis.
1. Ho: There is no significant relationship between stock market and Nigeria’s gross domestic product.
H1: There is a significant relationship between stock market and Nigeria’s gross domestic product.
2. Ho: Stock market does not have economic impact on the Nigerian economy.
H1: Stock market has economic impacts on the Nigerian economy.
1.5 SIGNIFICANCE OF THE STUDY
The general relevance of the study lies in its understanding of the
Economic Impact of Stock Market on Nigerian economy and so will be
particularly relevant in the following areas.
A. In particular, by using Nigeria stock market as empirical evidence,
the research will provide quantitative information which will enable us
to ascertain whether or not stock price fluctuations have impact on the
Nigerian economy. The finding of the study will reveal or will therefore
be relevant to the government and policy makers in fine-tuning stock
market policies that will be applied to ascertain sustainable in the
Nigerian stock market.
B. Also, it will relevant to the stock market operators, monetary
institutions or authorities and regulating agencies to harness and
fine-tune stock market prices to promote high performance level
especially at this critical moment of global economic crises and the
nation’s economic circumstances.
C. The findings if the study will equally afford quoted companies the
stock opportunity to assess whether or not they have been performing
well in terms of price stability.
D. Finally, a further justification for the study is the benefit of
applying the economic analysis of the impact of stock market in Nigeria
to economic and financial analysis kits and increases the stock of
knowledge in both the stock market and the Nigerian economy.
1.6 SCOPE AND LIMITATIONS OF THE STUDY
This work is a study of economic impact of stock market on the Nigerian
economy. The study employs empirical evidencefrom both stock market
using the Nigerian stock exchange and Nigerian economy as whole. The
choice is made out of the researcher’s interest in the given country’s
stock market and economic circumstances. The period covered by the
research is twenty-five (24) years period 1986-2010. The availability of
uniform data on the variables informed the researcher’s choice of the
period of analysis.
This study is limited by the following factors;
1. Paucity of materials: Materials for the study were not adequate which could not allow for an in-depth study.
2. Inaccessibility of data: Difficulty in accessing data for the study was yet another limitation.
3. Financial constraint: Lack of adequate funds on the part of the researcher constituted another problem.
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