The Impact Of Stock Exchange On Capital Accumulation In Nigeria; An Empirical Analysis 1980-2010

Project and Seminar Material for Economics

The Impact Of Stock Exchange On Capital Accumulation In Nigeria; An Empirical Analysis 1980-2010


This study examine empirically, economic analysis of the stock exchange and capital accumulation in Nigeria over the period 1980-2010. Nigeria as a country is immensely endowed, both in natural and human resources. However, every of Nigeria situation would be quick to recognize the negative factor lying on the roads to economic growth progress, among which are lack of public and private investment that result from government lack of comprehensive policies to reverse the trend. The stock exchange market is the prime motor that drive any economy on its path to growth and development.

The stock exchange market is a common feature of a modern economy and it is reputed to perform some necessary functions which promote the growth and economy development of the economy. To achieve this objective co-integration was employed using the data from 1980-2010. It was to estimate order to capture the impact of stock exchange market on capital accumulation. The results indicated that there is a positive relationship between Gross capital formation and all the stock exchange market variable used except market capitalization and exchange rate.

With 81.890 percent R2 and 73.871 percent R2, and DW- statistics of 2.0436, the result showed that capital accumulation in Nigeria is adequately explained by the model for the period of 1980-2010. By implication 73.871 percent of the variation in the growth of economic activities is explained by the independent variables. The result of the study which established positive link between the stock exchange market and capital accumulation, suggest the pursuit of policies geared towards rapid development of the stock exchange market. Also, all sectors of the economy should act in a collaborative manner such that the optimum benefits of linkage between the stock exchange and capital accumulation can be realized in Nigeria.

Chapter One


1.1 Background of the Study

The stock exchange market as an arm of capital market are central institution in long-term financial intermediation.

Stock exchange, as an important component of the capital market, play a significant role in the capital formation process and enhance developmental growth, because of the tremendous opportunities that ensue from its activities. The Nigerian stock exchange is expected to mobilize long term savings to finance long term investment by providing capital in the form of equity to entrepreneurs. The stock exchange is not just a financial institution but, the very hub of the capital market, which every activity of the capital market revolves.

Capital accumulation involves both a net addition and a redistribution of wealth, which may raise the question of who really benefits from it most. If more wealth is produced than there was before, a society becomes richer, the total stock of wealth increases. But if some accumulate capital only at the expense of others, wealth is merely shifted. It is possible that few organizations accumulate capital and grow richer, although the total stock of wealth of society decreases.

Securities market, primarily the stock market, measures the value of a firm’s capital stock. The value is the product of the price of installed capital and the quantity of capital. The work is about inferring the quantity of capital and therefore the amount of capital accumulation from the observed values of securities. In the simplest case, without adjustment costs, the price of capital is observed in capital goods markets and is also the price of installed capital. The quantity of capital is the value observed in the stock market.

There is an argument that the stock exchange market in developing countries in general have not leave up to expectations in terms of the extent and degree of capital mobilization for economic growth and development inspite of policies instituted by the government at various times. The performances of the Nigeria stock exchange over the nearly 30 years of its existence has been relatively poor compared to other stock exchange of similar age in some developing countries.

The stock exchange market has been assigned to play an important role in promoting capital accumulation. There is now a call for better corporate governance in order to protect the interests of the shareholders leading to stock market developments and capital accumulation. The avowed objective of government concern for a proper legal environment in the stock market is promotion of growth through capital accumulation.

Comparison of the Nigeria stock market with, Korea, Malaysia and india stock market based on such indications as market capitalization as a proportion of Gross Domestic Product(GDP) and value of stock traded, shows the dismal condition of the Nigeria capital market. Market capitalization as a percentage of GDP increased remarkably in all the countries except Nigeria between 1983 and 1999. (see Ogwu Mike and Omole, 2004). Only Nigeria did this ratio increase by less than a percentage point.

Other indicators, such as number of listed companies and the value of stock traded, also indicate the relative poor performance of the Nigeria stock exchange market.
The link between stock market and capital accumulation has often generated strong controversy and ambiguities, because it could refer to

  • A net addition to existing wealth
  • A redistribution of wealth

1.2 Statement of the Problem

In appraising the Nigeria stock exchange market the major problem is that of the capital market and money market which itself comprise the financial institution. The complexity in this understanding of operational system, the link of the capital with other specialized institution and the eventual effect of the capital market operations on the nations economics has been considered.

In effect, this study identified the problem relating to:

  1. Unavailability of enough literature covering the Nigerian capital market and capital securities.
  2. Public ignorance of the existence and benefits of Nigeria stock exchange stressing on the effect of this ignorance as far as loss of investment opportunity concerned.
  3. The major problem of stock market in highly fluctuating stock prices which are much beyond the possible changes in real worth of companies representing the stock.
  4. The internet problem in stock market rely on the fact that information may be false and misleading either causing stock prices to rise or fall. Also, illegal individuals artificially inflate the price of a stock for their own benefit.

1.3 Objectives of the Study

Looking deep in the stock exchange market in Nigeria, the study will basically provide an organized, fair, and efficient market for trading securities and secure a transparent strong and safe environment for trading securities to deepen trust in the stock market and this study basically to

  1. Creating an attractive and safe environment for investment.
  2. Developing processes and methods of trading securities in the stock market.
  3. Meeting the latest international standards.
  4. Disseminating trading information to the largest possible number of dealers and interested parties.
  5. Enhance the public awareness of all segments of society, while devoting especial attention to dealers of securities.
  6. Transparency and credibility in the dealings of the stock market.
  7. Estimate the relationship between stock exchange development and capital accumulation.

1.4 Hypothesis of the Study

There is a positive relationship between market capitalization and capital accumulation and also there is a positive relationship between portfolio investment and capital accumulation.

There is positive relationship between exchange rate and capital accumulation and a positive relationship between RGDP(Real Gross Domestic Product) and capital accumulation.

1.5 Significance of the Study

The study will also be of great advantage to individuals, entrepreneur and the public at large. Since the finding of this study will be very educative in terms of its impact on stock exchange and capital accumulation in Nigeria.

The finding of this study will be of great value to the government as it affects the development and growth of the economy which subsequently affects the monetary policy of the government.

1.6 Scope of the Study

Securities available in Nigeria stock exchange market can broadly be classified into two: Government development stock and industrial securities which comprise of equities, preferred stock. However in this study, we shall concern ourselves only with stock market size and capital stock since we are dealing with the stock exchange and capital accumulation. The period and topic is chosen to make the study as current and as relevant as possible. The study will also cover the performance of the stock exchange for period 1980-2008 and see the effect on capital accumulation.

1.7 Methodology of the Study

For the purpose of this, the research work will make use of theoretical exposition and analysis of secondary data.
The data for this study would be obtained mainly from secondary sources, particularly the Central bank of Nigeria (CBN) publications (such as the CBN statistical bulleting, CBN reports and statement of accounts), and other published works.

Chapter Five

Summary of Findings, Conclusion and Recommendation

5.1 The Summary of the Study

The Findings are presented thus;

A long run inverse relationship is observed to exist between CACC and Market capitalization (MKTCAP) given its slope coefficient of -0.207. The relationship is also observed to be statistically significant as the t-value of 17.08 exceeds the critical t value of 2.05 at 5% significance level. In the short run an inverse relationship with CACC is also noticed with a short run slope coefficient of -0.789. The relationship was observed to be statistically insignificant at 5%.The relationship between new issues (TONIS) and the Capital Accumulation in the long run is observed to be positive and also statistically significant given its slope coefficient of 0.237 and a t-ratio of 17.49 which exceeds the critical t-value of 2.05 at 5% significance level while in the short run a positive relationship with CACC is also observed as depicted by the short run slope coefficient of 0.033. However, the relationship was observed to be statistically insignificant at 5%.The long run relationship between exchange rate (EXR) in the stock market and CACC is observed to be inversely related to CACC given its slope coefficient of -1419.31. The finding is statistically insignificant at 5% level. Just like in the long run, TOLIST was also observed to display an inverse relationship with CACC in the short run with a short run slope coefficient of -2689.9 observed to be statistically insignificant at 5% level.A long run positive relationship was also observed to exist between value of transaction (VALTRAN) in the stock market and CACC. This is depicted by the slope coefficient of 0.8125 and a t-value of 15.61 which exceeds the critical value of 2.08 at 5% significance level and thus the finding is statistically significant at 5%. However, an inverse relationship with CACC was observed in the short run. This is depicted by the short run slope coefficient of -0.184. The relationship was observed to be statistically insignificant at 5%.

5.2. Discussion of Findings and Policy Implication

The relationship between Capital Accumulation and capital market is one that that attracted attention across researchers. The intriguing observation across a number of these studies is the heterogeneity in empirical findings over what may be termed a considerably uniform theoretical framework at least with regards to causality.

The finding of this study suggests that of the four capital market variables examined, two (New issues and Value of transaction) were found to exhibit a positive and statistically significant relationship with economic growth measured by CACC. On the contrary, Market capitalization (MKTCAP) and Total listing (TOLIST) exhibited inverse relationship with economic growth. Though, studies that have provided evidence in this regard did not clearly disaggregate the capital market indices, this study adopts that approach and show differences in the relationship between the disaggregated capital market indicators and economic growth. This could stimulate dialogue on the reason for such outcomes and the implication for policy simulation.

With regards to the study findings, Harris, (1997) re-examined the empirical relationship between capital market and economic growth and in contrast to Atje and Jovanovic (1993), he found no hard evidence that the level of capital market activity helps to explain growth in per capita output. Atje and Jovanovic, (1993) present a cross country study of capital market and economic growth over the period 1980-1988. They found a significant correlation between average economic growth and stock market capitalization for 40 countries. Kim and Singal, (2000), Bekaert and Harvey, (2000), Henry, (2000), and Bekaert et al., (2003) have all argued that stock market does have positive effects on the economy since it reduces the equity cost of capital and encourages information efficiency. Furthermore, Singh, (1997), Stiglitz, (2000), Allen and Gale, (2000) and others have argued that stock markets increases the level of capital mobility which in turn increases the speculative activities and market volatility leading to crashes. Irving, (2004) considered the links between capital market and overall socio-economic development to be tenuous, nonexistent or even harmful. Osei, (2005) and Nzue, (2006) examined the relationship for the Ghanaian and Ivorian economies respectively. The studies revealed that stock market performance granger-causes economic growth.

The policy implication of the study findings and others also examined raise several policy issues which need to be addressed so as to will reinforce the link between the stock market and economic growth in Nigeria. We identify them as follows;

Firstly, the Nigerian capital market currently is confronted with a crisis of confidence of investors on the market. The effect of the financial crisis coupled with the revelations of corporate malfeasance both by management of the capital market and quoted companies have resulted in adverse decline in the spate of activities in the stock market and there is a need to pursue policies that will reverse this trend.

Secondly, given that the stock market operates in macroeconomic environment, it is therefore necessary that the environment must be an enabling one in order to realize its full potentials.

Again, the determination of stock prices should be deregulated as well and Market forces be allowed to operate without any hindrance. Interference in security pricing is inimical to the growth of the market and should be under checks.

5.3 Conclusion

This study examines the relationship between capital market and Capital Accumulation in Nigeria using time series analysis. Several diagnostic test was performed on the data such as the Breusch-Godfrey correlation LM test for the presence of autocorrelation, the Breusch-Pagan-Godfrey test for Heteroskedasticity, the Ramsey Reset Test for non-linearity in the regression equation and the variance inflation factor (VIF) for the variables which measures the level of collinearity between the regressors in an equation. The result for the p-values of the test showed that the p-values all exceeded the critical 0.05 value at 5% significance level which suggests the rejection of the null hypothesis for the respective diagnostic test. The unit root test for all the variables showed that they all achieved stationary at 1st difference and the con integration result confirmed the presence of a long run relationship between the variables. The finding reveals that a long run inverse relationship is observed to exist between CACC and Market capitalization. The relationship between new issues (TONIS) and the Capital Accumulation in the long run is observed to be positive. However, the long run relationship between Total listing (TOLIST) in the stock market and CACC is observed to be inversely related to CACC. Also an inverse relationship was also observed to exist between value of transaction (VALTRAN) in the stock market and CACC. The specified error correction term (Ut-1(ECT) The error correction coefficient term coefficient of -0.33 which measures the speed of adjustment towards long-run equilibrium indicates a feed back of about 33% percent of the previous year’s disequilibrium from the long-run elasticity of CACC.

In conclusion, though, the research evidence have shown mixed findings for several economies, with regards to the Nigerian capital market, a key challenge is the loss of investor confidence in the system resulting from the unbridled corporate malfeasance on both the capital market operators, management and quoted companies. There is a need to take steps in restoring this declining confidence in the market.

5.4 Recommendations

In line with issues raised in the policy implications, the recommendation is that the relevant regulatory agencies in the capital market should be focused on enhancing the efficiency and transparency of the market in order to improve investor’s confidence. Also, there is need for effective and favorable macroeconomic environment to facilitate the causality from stock market to economic growth. It must be understood that growing economies with significant and consistent impact on living standards of the people are a product of effective social, economic and political institutions and this is a major setback in the Nigerian environment. Thus, there is the need to ensure that the channels of capital market induced growth are built around effective systems and that the policy institutions are actively involved in making systemic checks and appropriate policy innovations to ensure capital market led economic growth.

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