Chapter One:Introduction:

1.1         Background of the Study:

Market efficient hypothesis states that market prices fully and instantaneously reflect all relevant available information in determining security prices and that it is not possible for market participants to consistently and purposefully outperform a given market using any information that is already known by the market. This implies that market efficiency is consistent with a market in which (a) there are no transactions costs in trading securities, (b) all available information is costless to all market participants, and (c) all participants in the market are rational in decision, suggesting that all agree on the implications of current information for the current price and distributions of future prices of each security (Fama, 1970). In such a market, the current price of a security obviously "fully reflects" all available information. But the speed and manner in which the market adjusts to the relevant information on dividend and bonus issues declaration, has been punctuated by untimely release of information and poor behaviour of the

authorities. The excruciating influence of timidity that could emanate from insecurity of investors due to the intending insider trading and fall in investors’ confidence, deters trading

activities and the performance of the market (Manasseh, Asogwa and Agu, 2012). As the major ingredient needed to step up business activities in the market, consolidating business confidence could promote the ability of the market in mobilising the needed savings for investment. Therefore, to harness funds from local and foreign investors for viable investment opportunities, the need for information efficient market should be given precedence for the enhancement and restoration of depleted trust in the market (Manasseh et.al, 2012).

In information efficient market, prices of shares adjusts quickly to new information and enable more informed and efficient investment choices (Osinubi, 2000). In such markets, investors do not care about various trading strategies by fundamentalists, technicalist or chartists to beat the market with the bid of earning abnormal returns. But in the Nigeria capital market, the case is the reverse. In most cases, investors pay extra money to acquire additional information and sometimes go as far as sourcing for insider information on the values of companies listed with the exchange. So far, before certain information is announced, some investors have already traded on the information, causing disparities in available information among market participants. For instance, on June 3rd 2005, Intercontinental Bank Plc, acquired by Access Bank Plc in 2011, announced bonus issues of 1 for every 10 shares simultaneously with the declaration of N0.22 dividend for its shareholders. On this note, it was expected that the market should have

reflected the publicly available information on bonus issues and dividend without bias to avoid 1

the possibility of investors beating the market by making abnormal profit. But it was noticed that people started trading on the shares of this firm five days before the announcement date. Five days before the event date, the share price of the Bank stood at N7.81, N7.81, N7.81, N6.90, and N6.90 respectively even higher than the share price of the firm on the day of the announcement (N6.24). After the announcement date, it fell to N5.93, N5.64, N5.36, N5.10 and N5.13 respectively (NSE, various years).

Similarly, on 3rd August, 2007; 25th July, 2008; 31st October, 2008 and 15th August, 2008, it was also observed that shares of Zenith Bank Plc, Floor Mills Plc, Union Bank Plc and Union Homes Savings Plc respectively were seriously traded five days before the date of announcement on simultaneous declaration of bonus issues and dividend leading to a fall in share prices of these firms on and after the announcement date (NSE, various years). Thus, disproportions in the information available to equity issuers or investors could results to overpricing or under pricing of shares (Edmans, 2009; Ayadi and Bouri, 2009 and Gao, 2008). When a share is overpriced or underpriced as a result of insider information, the level of confidence in the market would be deterred and the returns of the firms would be affected. In turn, the contributions of the firms to all share indexes and the market capitalisation would be insignificant. This is because, Investors who are always risk averse could withdraw their money or invest it in other less productive ventures, leaving the market performance gauges in a shamble state (George and Oseni, 2012). Hence, the efficiency of the Nigerian capital market in terms of quick incorporation of all available information correctly and instantaneously is of paramount important. So, when new information is added to the market, its revaluation implications on security returns are impounded in the current market price unbiased (Gagan and Mahendru, 2009). In such markets,

firms make productive investment decision while investors choose among the securities that represent ownership of firms’ activities without the anxiety of making losses (Afego, 2012).

It should be noted that access to investment capital, through well functioning capital markets, is crucial for growth and development particularly in capital-scarce developing countries like Nigeria. Capital markets facilitate the pricing and diversification of risk, aid in the price-discovery process of financial assets and enhance the operations of the domestic financial system (Afego, 2012). By mobilising savings from surplus spending economic units to the deficit spending units, an efficient capital market provides avenues for effective and optimal utilisation of funds for long-term investment purposes. In addition, it encourages the inflow of foreign capital by creating a platform for foreign companies or investors to invest in domestic securities;

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provide needed seed money for capital development; and act as a reliable medium for broadening the ownership base of family-owned and dominated firms (Afego, 2012).

Be that as it may, to tap from the benefits inherent in efficient capital market, the need to promote the Nigerian capital market to a higher level of sophistication to meet the G-30

recommendation for emerging markets become important. However, the market authorities have shown much concern in the restoration of depleted investor’s confidence and expansion of

capital market activities across the country to boost the liquidity and to reduce the transaction cost in the market. As a result, from 1993 till date, the Nigerian capital market has gone through different phases of reforms. This has led to the abrogation of laws that constrained foreign participation in 1995; replacement of call over system with automated trading system (ATS) in 1999 to enable simultaneous online trading in all branches of the Nigerian stock exchange; the implementation of full remote trading project under which dealing members could trade online at the comfort of their offices in different parts of the country. Other reforms include the introduction of the Central Securities Clearing System (CSCS) to clear and settle transactions within three days (T+3) as against T + 14 which is in consonance with the G-30 recommendation; the establishment of Desk for phone-in-service where an investor can phone in and obtain on the spot stock balance; introduction of trade alert; Capital Trade Points (CTPs) by creating mini stock through which small companies can get listed and avail themselves the opportunities offered by the market, and the establishment of Investment Security Act (ISA) to prosecute all manner of unacceptable behaviours and the insider abuse (NSE, 2004 and NSE factbook, various years). In addition, in 2012, exchange traded fund (ETF) was introduced to avail investors the benefits of low costs and tax efficiency. This is followed by the introduction of market-making, by authorizing some dealers in the market to trade a stated security on its own account at any time at the quoted price.

To strengthen the newly introduced practices by Nigerian stock exchange (NSE) and security and exchange commission (SEC) in order to promote the efficiency of the Nigerian capital market, the federal government of Nigeria came up with idea of reinstating deteriorated investors confidence to abate the perverted act in the market. To this, many institutional reforms was initiated to promote transparency and accountability in the market. Among others, this includes the enforcement of strict regulations to guide business activities and to combat high level of corruption in the market. For instance, in 2000, the federal government of Nigeria established the Independent Corrupt Practices and Other Related Crimes Commission (ICPC) to investigate

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reports on corruption and in appropriate cases prosecute the offenders. In 2003, the Economic and Financial Crimes Commission (EFCC) was established as a law enforcement agency to investigate financial crimes and money laundering. In addition, in June 2009, the Association of Certified Anti-Money Laundering Specialists (ACAMS) was also established. The commission works with other international bodies such as the United Nations Committee on Anti-Corruption (UNCAC), Transparency International and the African Union (AU) Convention against Corruption to control and prevent money laundering and terrorist financing. Hence, in 2010, Asset Management Corporation of Nigeria (AMCON) was established to address the problem of non-performing loans in the Nigerian banking industry, along with Consumer and Financial

Protection Division to provide a platform through which investors/consumers can seek redress (NEED, 2004 and ICPC, 2003). Also, the articulation of a blue print known as “The Project Alpha Initiative” was launched to remove the inherent weaknesses and fragmentation in the

Nigerian financial system.

In view of these recent developments, accompanied with pre and post bank consolidation policy

reforms in 2004 and 2006 respectively to avoid persistence occurrence of bank liquidation and loss of depositors’ fund, the Nigerian Capital Market recorded a dramatic upward trend in its

performance indices. In light of the discussed best practices and newly introduced regulations, between  1992  and  2002,  the  Nigeria  Capital  Market  recorded&nbs