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ABSTRACT
This study attempts to investigate the Role of the Stock Market in the Growth of the Nigerian Economy spanning through 1980 – 2010. The broad objective of this work is to ascertain the role of the stock market in output growth in Nigeria using Market Capitalization as a proxy for the stock market taking cognizance of some intervening variables. This was evaluated using OLS Method. It was observed that market capitalization has a significant impact on economic growth as well as the latter Granger Causing the former. There are also other variables that are modeled alongside market capitalization that affect the output of Nigeria. The policy recommendation in this work centres on deliberate attempts by the government and every agent responsible for the existence of the market either as a player or an umpire to be up and doing especially the government. The work is organized into five chapters, time series data were used with three regressors: market capitalization, domestic savings and value of traded stocks.
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Stock Market is viewed as a medium to encourage savings, help channel
savings into productive investment, and improve the efficient and
productivity of investment. The emphasis on the growth of stock markets
for domestics‘ resource mobilization has also been strengthened by the
need to attract foreign capital in non-debt creating forms. A viable
equity market can serve to make the financial system more competitive
and efficient. Without equity markets, companies have to rely on
internal finance through retained earnings. Large and well established
enterprises are in a privileged position because they can make
investment from retained earnings and bank borrowings, while new
companies do not have easy access to finance. Without being subjected to
the scrutiny of the stock market, big firms get bigger, and for the
emerging smaller companies, retained earnings and fresh cash injections
from the controlling shareholders may not be able to keep pace with the
needs for more equity financing which only an organized market place
could provide. The corporate sector would also be strengthened by the
requirements of equity markets for the development of widely acceptable
accounting standards, disclosure of regular, adequate, and reliable
information. While closely held companies can camouflage poor investment
decisions and low profitability, at least for a while, public held
companies cannot afford this luxury. The availability of reliable
information would help investors make compares‘ of the performance and
long term prospects of companies; corporations to make better investment
and strategic decisions; and provide better statistics for economic
policy makers.
Success in capital accumulation and mobilization for development varies
among nations, but it is largely dependent on domestic savings and
inflows of foreign capital. Therefore, to arrest the menace of the
current economic downturn, effort must be geared towards effective
resource mobilization. It is in realization of this that consideration
is given to measure the development of capital market as an institution
for the mobilization of finance from the surplus sectors to the deficit
sectors. Levine (1991) showed a positive relation between financial
stock market and economic growth by issuing new financial resources to
the firms. The financial stock market facilitates higher investments and
the allocation of capital, and indirectly the economic growth.
Sometimes investors avoid investing directly to the companies because
they cannot easily withdraw their money whenever they want. But through
the financial stock market, they can buy and sell stocks quickly with
more independence. An efficient stock market contributes to attract more
investment by financing productive projects that lead to economic
growth, mobilize domestic savings, allocate capital efficiently, reduce
risk by diversifying, and facilitate exchange of goods and services
(Mishkin 2001; and Caporale et al, 2004).
1.2 Statement of the Problem
There is abundant evidence that most Nigerian businesses lack medium and
long –term capital. The business sector has depended mainly on
short-term financing such as overdrafts to finance even long-term
investment. Based on the maturity matching concept, such financing is
risky. All such firms need to raise an appropriate mix of short- and
long-term capital (Demirguc-Kunt and Levine 1996). Most recent
literatures on the Nigeria Capital Market have recognized the tremendous
performance the market has recoded in recent times. However, the vital
role of the capital market in economic growth and development has not
been empirically investigated thereby creating a research gap in this
area. This study is undertaken to examine the contribution of the
capital market in the Nigerian economic growth and development. Aside
the social and institutional factors inhibiting the process of economic
development in Nigeria, the bottleneck created by the deficiency of
finance to the economy constitutes a major setback to its development.
As a result, it is necessary to evaluate the Nigerian capital market.
1.3 Research Questions
In the light of the research problems, this study attempts to answer the following:
1. Does stock market have a significant effect on economic growth?
2. Does investment have a significant effect on GDP?
3. What is the causality between stock market and economic growth?
1.4 Objectives of the Study
The broad objective of this study is to examine the role that the stock
market plays in the growth process of the Nigerian economy.
However, the specific objectives are as follow:
1. To determine the nature of relationship between stock market and economic growth.
2. To examine the determinants of investment in the stock market.
3. To determine the causality between stock market and economic growth.
1.5 Hypotheses of the Study
1. Ho: That the capital market has a negative relationship with economic growth.
2. Ho: portfolio Investment in Nigeria is not a determinant of economic growth.
3. Ho: There is no causal relationship between stock market and economic growths.
1.6 Significance of the Study
The study will explore the effectiveness of capital market instruments
on Nigerian economic growth. Though the scope of study will be limited
to the capital market, it is hoped that the exploration of this market
will provide a broad view of the operations of the capital market. It
will contribute to existing literature on the subject matter by
investigating empirically the role, which the capital market plays in
the economic growth and development of the country. The main importance
of this study is that it will provide policy recommendations to policy –
makers on ways to improve operations and activities of the capital
market.
1.7 Scope of the Study
The economy is a large component with lot of diverse and sometimes
complex parts; this research work will only look at a particular part of
the economy (the financial sector). This work will not cover all the
facts that make up the financial sector, but shall focus only on the
capital market and it role as it impacts on the Nigerian economic
growth. The empirical investigation of the role of the capital market on
the economic growth in Nigeria shall be restricted to the period
between 1980 and 2010 a period of thirty (30) years.
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