Effect Of Financial Meltdown On The Performance Of The Nigerian Capital Market

Project and Seminar Material for Economics

Effect Of Financial Meltdown On The Performance Of The Nigerian Capital Market


A major engine of economic growth and development of any nation is its capital market. Until quite recently, the Nigerian capital market was the toast of many enlightened Nigerians both home and abroad. This research study investigated the impact of financial meltdown on the capital market with particular reference to the Nigerian stock exchange (NSE). In carrying out the study, survey research design was adopted and observations were drawn each from the periods before the crash and after the menace. Using F- test statistical analysis, three hypotheses were tested with respect to NSE ALL Share Index (ASI), Market Capitalizations and Market Turnover were rejected implying that the tests were statistically significant.

Similarly, using market model, it was discovered that there were significant changes in individual quoted securities and expected returns in the period under consideration. Above all, the findings of the study revealed that the financial meltdown impacted negatively on the operational performance and efficiency of the Nigerian stock market. It was recommended that the Nigeria government should inject physical cash into the stock market as a way of bail out in order to restore the lost confidence in the market and also the investors and stock market operators should play the games according to the rule.

Chapter One


1.1 Background of Study

A capital market, according to Ologunde, Elumilade and Asaolu (2006), is a collection of financial institutions set up for the granting of medium and long term loans. It is a market, as Olugunde et al. (2006) further noted “for government securities, corporate bonds, and the mobilization as well as the utilization of long term funds for development – the long term end of the financial system”. In line with the above assertion, Murinde (2006), opine that capital markets are markets for trading long term financial securities, including ordinary shares, long term debt securities such as debentures, unsecured loan stock and convertible bonds. More specifically, one must note that the capital market in any economy provides the mechanism through which investors interact directly or indirectly (through financial intermediaries) with borrowers, by making available, their surplus funds to those who intend to borrow them for use in their respective businesses.

As a market that synchronizes the different portfolio preferences of investors and financial intermediaries, the capital market is paramount to the acceleration of the economic development of economies across the globe (Oladipupo, 2010; Okafor & Arowoshegbe, 2011; Idolor & Erah, 2011; Ogege & Ezike, 2012 and Otto, Ekine & Ukpere, 2012). This is why most governments pay reasonable attention to the activities of the market since it is not only crucial, but also central to the entire capital mobilization process (Ologunde et al., 2006) which gives room for the creation of goods and services meant for the satisfaction and well being of the citizenry of any country.

Jeroh (2010) believes that the global financial system has in the last ten years witnessed rapid growth and substantial structural change, leading to globalization of financial markets in the world over. This has however resulted in an interrelatedness of world economies owing to the fact that the world is becoming a global village and there seem to be an integration of financial markets (Ajakaiye & Fakiyesi, 2009) which has spearheaded a form of rapid flow of capital across the globe. This interrelatedness of world economies in addition to the integration or connectivity of financial markets (Sanusi, 2011) is believed to have magnified the contagious effects of the recent global financial crisis or meltdown with implications for the transmission of financial policies on economies globally simply because any development in any part of the world affects other parts as well.

Over the years however, the Nigerian Capital Market is believed to have experienced series of shocks, and in recent times, a downturn in economic activities believed to have been induced by significant divestment by foreign investors as a result of the ill wind of financial recession that blew financial markets all round the globe (Jeroh, 2012). It is on this background that this study is designed to take a second look at the impact of the recent global financial crises on capital markets, with specific reference to the Nigerian capital market.

1.2 Statement of the Problem

  1. The significant difference in stock index between the bubble period and crash period.
  2. The statistical significant relationship between market capitalization of the Nigerian exchange in the pre and post economic meltdown.
  3. The fundamental change in the total market turnover in the NSE between the bubble period and crash period.

1.3 Objectives of Study

Financial meltdown refers to event like steep 4ii in stock market, decline in asset values and corporate losses that hurt the economy and investors. The main objective of this study is to provide a scientific investigating into the impact of financial meltdown on the Nigerian capital market. From the main objective we then have sub- objectives of the study this includes:

  1. To identify the significant difference in stock index between the bubble period and crash period.
  2. To identify the statistical relationship between total markets capitalization of the Nigerian stock Exchange in the pre and post economic meltdown.
  3. To identify the fundamental change in the total market turnover in the NSE between the bubble period and crash period.

1.4 Research Question

The Nigerian capital market as a segment of the financial system has evolved with the growth of the Nigerian economy. The market has been predominantly equities driven with the banking sector making up an important proportion of total market capitalization.

This research shall be guided by the following research questions;

  1. Is there any significant difference in stock index between the bubble period and crash period?
  2. What is the statistical significant relationship between total market capitalization of the Nigerian stock Exchange in the pre and post economic meltdown.
  3. Is there any fundamental change in the total market turnover in the NSE between the bubble period and crash period?

1.5 Research Hypothesis

The research hypothesis that would be tested in the course of this research is stated below as:

  1. Ho: There is no significant difference in stock index between the bubble period and crash period.
  2. Ho: There is no statistical significant relationship between total market capitalizations of the Nigerian Stock Exchange in the pre and post economic meltdown.
  3. Ho: There is no fundamental market change in the total market turnover in the NSE between the bubble period and crash period.

1.6 Scope of the Study

The scope of this study will be limited to the Nigerian capital market with special reference to the level of stock price movements in the Nigerian bourse, data on United States Dow Jones Industrial Average (DJIA) as well as United States Gross Domestic Product(USGDP). The study will also utilize data concerning the Nigeria stock market all share index and the Nigerian Gross Domestic Product (NGDP). Hence, all data will be collected for the period 1990-2008.

1.7 Significance of the Study

The Nigerian stock market has changed greatly over the last decade. This is basically as a result of the various capital market reforms that have been implemented over the years. This has led to an increase in the level of activities in the stock market.

The significance of the study is of two fold namely practical and theoretical significance. Practically, this study will be useful not only in the Nigerian Stock Exchange but also to other financial institutions that may be opportune to lay hands on a copy of this study. Theoretically, the study will be useful to scholars as well as researchers, the findings of the study can generate researchers interest on different area of the impact of global financial crisis, which will enrich the literature of the impact of global financial crisis stock market volatility and the Nigerian economy.

1.8 Organisation of the Study

The study is organized into five chapters as follows,

  • Chapter one provides the background to the study, statement of the research problems, objectives of the study, hypotheses, the scope of the study, the significance, the organisation, and the limitation of the study.
  • Chapter two contain the review of related literature from various authors, journals and newspapers.
  • The forms of chapter three is the research methodology with emphasis on model specification, sample and sampling techniques, analytical tools, data collection and data analysis
  • Chapter four is concerned with data analysis as well as the various data presentation techniques to be used.
  • The summary and conclusion from the study, recommendations offered and suggestions for further studies is covered in chapter five.

1.9 Limitations of the Study

The data utilized in this study are purely secondary in nature. This covers data on All Share Index and Gross Domestic Product which are usually from accurate in an emerging economy (Nigeria inclusive) as a result of inadequate record keeping, and inefficiency on the part of the official statutory agencies. Also, results from data can be baise as a result of the imprecise measurement of variables. However, the inability for the research to obtain a completely random sample and the smallness of the sample size is also encountered. Effort will however be made to ensure that these limitation are significantly reduced.

Chapter Five

Discussion of Results, Summary of Findings, Conclusion and Recommendations

5.1 Discussion of Results

Table 1.5 shows the relationship between the global financial crisis and the Nigerian stock market for the period under study. Using the a priori criteria of evaluating the parameters, except the constant term, all other variables met no a priori expectations hence not fulfilling the economic criterion of the model. The results show that FXGR is linear (positive) and statistically insignificant to MKTPZ while, FDISMKT also have a linear (positive) and statistically insignificant relationship with MKTPZ. However, in contrary FRVS is non- linear (negative) and also statistically insignificant to MKTPZ. Furthermore, the results of the test of the overall significance of the model using F-statistics shows that the entire model is statistically significant. We arrive at this conclusion because the F-statistics of 0.938073 is greater than the F-probability which is statistically near zero as: 0.000143. The coefficient of multiple determinations (R2) indicates that approximately 75% of total variation in the dependent variable (MKTPZ) is explained by the independent variables in the model. This means that the model is a good fit. Finally, the Durbin-Watson statistics, a rule of thumb for the measure of autocorrelation is greater than the R2 (1.228950>0.745430), thus indicating the absence of first order autocorrelation.

From the t-statistics and its associated probabilities test shows that the parameters which are foreign exchange rate (FXGR), foreign direct investments on stocks (FDISMKT) and foreign reserves (FRVS) respectively as proxy of global financial crisis except the constant term are not statistically significant at 5% level. Thus, we therefore, accept the null hypotheses and conclude that the global financial crisis has no significant impact on the Nigerian stock market performance. Based on existing economic theory that, if the foreign exchange rate is devalued it will increase foreign direct investment or mobilizes capital inflow and invariably increase market capitalization. Thus, this motive of regulating foreign exchange rate to attract foreign investment and to increase foreign reserves to strengthen the local currency is overturned in this model. Analyst and market insiders have given various reasons for the persistence fall in the prices of stock in the market ranging from budget delay, exit by foreign investors to other profit making ventures and price manipulation by insiders, but this result and the continued bearish trend have falsified the postulation. Now we can say that policies of regulators must have played a negative role in deepening the recession or the financial crisis, as many of the policies acted out of line with the realities on ground in the Nigerian stock market. These include the withdrawal of the margin facility by the apex bank, the uniform end of the year financial statement by banks, over subscription, greed and ignorance, domestic monetary and financial policies, etc. Only the intercept has significant impact on the Nigerian stock market performance for the period under study. This confirms that other variables not capture in the model affected the market capitalization as the aftermath of the global financial crisis.

5.2 Summary of Findings

The study findings are summarized as follows:

  1. Foreign exchange rate has no significant impact on the Nigerian stock market performance for the period under study.
  2. Foreign direct investments on stocks have positive but insignificant impact on the Nigerian stock market performance for the period under study.
  3. Foreign reserves have no significant impact on the Nigerian stock market performance for the period under study.
  4. The study also found that 25% of other factors not accounted for in the study tend to be causal factors of shocks for Nigerian stock market in response to the global financial crisis.

5.3 Conclusion

The crux of this project examined the impact of global financial crisis on the Nigerian stock market performance; with particular interest to proxy the impact variable (global financial crisis) as foreign exchange rate, foreign direct investment on stocks and foreign reserves and market capitalization as stock market performance proxy. The study carried out a thorough comprehensive related literature review and found that there was no consensus among the researchers on the studied topic, some agree with significant implications while others submitted entire negative and insignificant implications. The ordinary least square regression model was employed to test the parameters and the t-test was used to test the three hypotheses outlined in the study to give clarity of purpose. The outcome of the test shows that the global financial crisis has no significant impact on the Nigerian stock market performance for the period under study. Thus, this is not withstanding that, the global financial crisis has cause an unprecedented process of shocks on the Nigerian stock market operations, resulting to enormous capital flight that shakes its operations in the system. Our conclusion therefore, is that, there should be a proactive and effective regulatory system redesigned for the successful operation of the Nigerian stock Market and as well as to allow privatization policy to strive. This will motivate domestic and allied investors not to relent in their investment and developmental strives in the Nigerian stock market as to better the economy at large.

5.4 Recommendations

From the empirical analysis and results obtained from the T- test, we are constrained to recommend as follows:

  1. Government and regulatory authorities should put in place workable and effective policies to check the vast range of foreign exchange rate disparity in order to attract capital inflow.
  2. Improve the declining market capitalization by encouraging more foreign investors to participate and invest in the market. This is because capital inflow and market capitalization are positively related.
  3. Restore confidence to the market by regulatory authorities through ensuring transparency and fair trading transactions and dealings in the stock exchange.
  4. Ensure peace and stability in the socio-economy and the political system of the nation by stopping religion and ethnic crisis. This will also encourage more foreign investors into the system.
  5. We also recommend: Impact of information difference on the Nigerian stock market performance as an area to re-examine.

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