Share Price Volatility And Economic Growth Of Nigeria (1987-2016)
This research work was conducted to ascertain the effect of share price volatility on the economic growth of Nigeria. The research used series of test such as the unit root test that was used to test for stationarity, the co-integration test was used to check for the long run and short run relationship between the variables, and the error correction model that estimate the speed at which a dependent variable returns to equilibrium after a change in other variables. The augmented ADF test of stationarity shows that all the variables are not stationary at levels but are stationary at first difference at the 0.05 level of significance, The long run equation reveals that all the variables in the model met a priori expectation in the long run, The all share price index growth rate shows a direct relationship with economic growth in Nigeria but is statistically insignificant as shown by its high standard error.
A unit increase in the all share price index would lead to a 0.41 units increase in the gross domestic product. The vector error correction model shows the short run relationship that exists among the variables in the model, the all share index also has a direct relationship with the gross domestic product in the short run. A unit increase in the all share index would lead to a 0.72 units increase in the gross domestic product but is also statistically insignificant. The study therefore recommends among other things that In order to make the stock market more stable and reduce the variances of its performance, the manpower and processes of the Securities and Exchange Commission (SEC) should be further strengthened. This should enable the organization improve on its oversight function of the capital market and engender improvement its performance.
1.1 Background to the Study
The origins of the Nigerian Capital Market date back to colonial times when the British Government ruling Nigeria at the time sought funds for running the local administration. Most these funds derived from agriculture, produce marketing and solid mineral mining. Discovering that these sources were inadequate to meet its growing financial obligations, the colonial administration decided to expand its revenue base by reforming the system of revenue mobilization, taxation and other payments. It also saw the need to raise funds from public sector to cover temporary shortfalls in funds availability. Hence, it found it necessary to establish a financial system by setting up the basic infrastructure for its take off pending the development of an organized private sector.
According to Odife (2000), the first step in this direction was to secure the necessary finance for the development of this infrastructure and long-term capital project. This it did in 1946 when it promulgated the 1946 10-year plan Local Loan Ordinance for the floatation of the first N300,000, 3% Government stock 1956/61 with its management vested on the Accountant-General. In 1957, the government and Other Securities (Local Trustees Powers) Acts was enacted. This law specified the types of securities in which trust funds may be invested. It also clearly defined the powers and responsibilities of trustees. In addition, the colonial government set up the Professor Barback committee to examine the ways and means of fostering a share market in Nigeria. Part of the terms of reference of this committee included the possibility of establishing a capital market in Nigeria. The committee recommended, among others, the creation of facilities for dealing in shares , the establishment of rules regulating share transfer and measures for encouraging savings and issues of securities of government and other organizations.By the end of the year (1957), the colonial administration had promulgated the General Loan and Stock Act and the Local Loan (Registered Stock and Securities) Act on the recommendations of the Barback Committee. In 1958, the Central Bank of Nigerian was established through the Central Bank of Nigeria Act of 1958.
The purpose of these various legislations was to establish the legal and infrastructural frame work for the take off of a viable securities/capital market in Nigeria. As a follow up to these laws, the colonial administration issued the first N2 million Federation of Nigeria Development Loan Stock in May 1959. In 1959, it also enacted the Statutory Corporations (Guarantee of Loans) Act. In April 1960, the Central Bank of Nigeria issued the first Nigerian Treasury Bills which were meant to provide an avenue for the investment of short-term liquid funds in Nigeria and assist in providing government with funds pending receipt of its own revenues. On September 15, 1960, the Lagos Stock Exchange was incorporated as a private limited liability company, limited by guarantee under the provisions of the Lagos Stock Exchange Act 1960.
The Lagos Stock Exchange Act 1960 conferred monopoly powers on it members to deal in securities granted quotation on the Exchange. It also allowed the Central Bank to Deal directly in securities. On June 5, 1961, the Lagos Stock Exchange opened for business with 19 listed securities made up of 3 equities, 6 Federal Government Bonds and 10 industrial loans. In 1961, “the National Provident Fund was established as a compulsory contributory savings scheme aimed at providing some protection to contributors at old age, invalidity or temporary loss of employment”. The enabling Act required the Fund to invest its surplus funds only in securities in Nigeria authorized by the Trustee Investment Acts of 1957 and 1962 and restricted to securities created or issued by or on behalf of the government of the federation (SEC, 1999:49). By 1962, the Exchange Control Act and Trustees Investment Act were enacted. The Capital Issues Committee was also constituted to examine and recommend the establishment of an apex monitoring institution for the growing Nigerian Capital Market.
In 1966, the Borrowings by public Bodies Act was enacted. This was followed in 1968 by the Companies Decree and the Banking Decree in 1969. In 1972, the Nigerian Enterprises Promotion Decree was promulgated which was followed in 1963 by the Capital Issues Commission Decree. The Capital Issue Committee thus became the apex regulatory body for the Nigeria Capital Market. By this decree, it was empowered to determine the price and timing of new issues of securities through offer for sale or for subscription.
In 1977, the name of the Lagos Stock Exchange was changed to the Nigerian Stock Exchange by the Indigenization Decree of 1977 followed the recommendations of the Industrial Enterprises Panel (Adeosun Panel) of 1975 that branch exchanges should be established. As a result, six new trading floors of the Nigerian Stock Exchange were created in Kaduna (1978), Port Harcourt (1980), Kano (1989), Onitsha (1990) and Yola (2002). On April 1, 1978, the Securities and Exchange Decree was promulgated to replace the Capital Issues Commission and expand the scope of its activities following the recommendations of the Financial System Review Committee (Okigbo Committee) of 1976.
The Committee also recommended the establishment of multiple exchanges and the approval of share allotments by the Securities and Exchange Commission. In 1978, the first state government revenue bond was floated by the defunct Bendel State of Nigeria. The N20 million 7% first Bendel State Loan was floated to finance the state’s housing development programme. On April 5, 1985, the Second-tier Securities Market (SSM) of the Nigerian Stock Exchange was established to cater for the requirements of small and medium scale enterprise. It essentially diluted the listing requirements of this category of companies to encourage them to seek quotation and thereby further broaden and deepen the market. In 1987, the Nigerian Enterprises Promotion Decree 34 (Issue of non-voting equity shares) was promulgated permitting public companies quoted on the Nigerian Stock Exchange to issue through the Exchange, non-voting paid-up shares for the subscription of persons whether citizens of Nigeria or not and whether resident in Nigeria.
In 1988, the functions of the Securities and Exchange Commission were further expanded by Decree 29 of 1988 to include the review and approval of all mergers, acquisition and combinations between or among companies. In 1988 also, the Privatization and Commercialization Decree 25 was promulgated. This Decree provided for the privatization of some enterprises in which the Federal Government of Nigeria has equity interest and the commercialization of some Federal Government wholly-owned enterprises.
The exercise that ensued from this Decree brought more companies to the Nigerian Stock Exchange whose shares were thus listed. Similarly, in 1958, Debt Conversion was officially adopted by the Central Bank of Nigeria and a guideline on the debt conversion programme published. The Nigerian Deposit Insurance Corporation was also established in 1988 to monitor the performance of the banking sector and insure depositors against possible bank distress and consequent loss of funds. In 1989, the Companies and Allied Matters Act (CAMA 1990) was enacted to regulate the incorporation, corporations and activities of all bodies in Nigeria. By 1991, following the spate of large scale distress in the financial system, the Banks and Other Financial Institutions Decree 25 (BOFID), 1991was promulgated to monitor the operations of the banking and financial sector and reduce the tide of distress. In 1991, the Inter ministerial Committee on the Nigerian Capital Market recommended the discontinuation of official pricing of securities as well as the establishment of more stock exchanges.
The Central Bank of Nigeria Decree of 1991 was also promulgated; this decree expanded the functions of the Central Bank granting it greater autonomy in monetary policy and repealed the Central Bank of Nigeria Act 1958. In 1992, the first municipal bond in the Nigerian Capital was floated by the Lagos Island Local Government. The first Lagos Island Local Government Floating Rate Revenue Bond N100 million was floated to finance the Sura Shopping Complex in Lagos. The coupon rate was 24.75%.
In 1992, The Chartered Institute of Stockbrokers Decree was promulgated which granted the Institute of Stockbrokers powers to charter stockbrokers and dealers, conduct examination for brokers and generally oversee the conduct of its members in the interest of the orderly development of the capital market. On July 29, 1992, the Central Securities Clearing System was incorporated as the official central clearing and depository of the Nigeria Stock Exchange. The CSCS was incorporated to implement a computerized Stock Exchange Management System (SEMS) which emphasizes the immobilization of share certificate in a Central Depository.
In 1993, the federal government, through its budgets presentation, formally deregulated the capital market, thus ending the official pricing, timing and allotment of securities issues. These functions were passed on to the issuing houses to perform. In 1993, the second Kaduna State Revenue Trust Fund (NSITF) was created by decree to replace the National Provident Fund. By this Act, the scope of activities of the National Provident Fund was expanded and the National Provident Fund Act thereby repealed.
The Nigerian stock exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World Bank, 1994; Anyanwu et al,1997). The introduction of SAP in Nigeria resulted in significant growth of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile, 1996; Soyode,1990).The liberalization of capital market led tremendous changes with respect to volume, number of deals and value of securities traded as well as the number of securities listed in the market, yet there are concerns on its impact at the macro-economic level.
Again the capital market was instrumental to the initial twenty-five Banks that were able to meet the minimum capital requirement of N25billion during the banking sector consolidation in 2005. The stock market has helped government and corporate entities to raise long term capital for financing new projects, and expanding and modernizing industrial/commercial concerns.Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various governments and companies in Nigeria.
1.2 Statement of Problem
This research work is concerned with the reasons why the Nigerian Stock Exchange has not made the much desired impact on the economy of this country as designed by the decree establishing it. It will also evaluate the effect of share price volatility on the capital market returns and economic growth to finding solutions to the following problems:
- How can the desired awareness and confidence be instilled on this market?
- How can the functions and roles of this market in facilitating the growth of the economy be achieved?
- How can this market be developed to meet international standard?
- How can the limited numbers of available instruments traded in the market and discriminated in favor of large firms be solved?
- The problems of unclaimed dividends among others have been able to hinder or draw back the swift/ function of the capital market in Nigeria.
Also, considering the underdeveloped state of the Nigerian Stock Exchange, what could be done to position it strongly as its western counterparts?
1.3 Research Questions
The study seeks to provide answers to the following questions:-
- What is the effect of share price volatility on capital market returns?
- What is the effect of the capital market returns on the growth of the Nigerian economy?
1.4 Objective of the Study
The main objective of the study is to ascertain the effect of share price volatility on the capital market returns and economic growth. The specific objectives are to:
- Examine the effect of share price volatility on capital market returns
- Ascertain the effect of the capital market returns on the growth of the Nigerian economy.
1.5 Hypotheses of the Study
For the purpose of this study, all hypotheses are stated in null form, The following hypotheses were tested;
- Ho: There is no significant relationship between share price volatility and capital market returns.
- Ho: There is no significant relationship between capital market returns and economic growth in Nigeria.
1.6 Significance of the Study
The study is significant in a number of ways.
- It will help students in various institutions of learning to read and know much about capital market in Nigeria.
- It will also serve as a reference material for future researchers.
1.7 Scope and Limitation of the Study
This research works focuses on the share price volatility capital market returns and the Nigeria economy between the periods of 1987 to 2016.
In the course of this study, the researcher came across problems which in one way or the other challenge the simple flow of this work. These include:
It seems there was not enough time to meet up with this work. But however, the researcher properly managed his time effectively and efficiently.
at a time it was difficult and nearly impossible to continue because of demand for finance.
iii. Forecasting And Hoarding Of Information:
Forecasting seems to be prevalent in the market as most of the transactions were dependent on it. Equally, I observed in the course of this research that those approve for information were not really willing to give it.
The human bourgeois also tried to hamper this study by constant body breakdown as a result of fatigue, tiredness and distractions.
Summary, Conclusion and Recommendations
This study was carried out to investigate the impact of the Nigerian capital market on economic growth in Nigeria. The study employed trend, descriptive statistics and econometric techniques such as the Augmented Dickey-Fuller (ADF) test of unit root, the Johansen cointegration test of long run relationship, the Vector Error Correction Model (VECM) and the pair wise granger causality test.
- The study found that market capitalization has a negative impact on economic growth in the long run. All share price index had a positive relationship with economic growth while the exchange rate and inflation rate had a negative relationship with economic growth in the long run.
- The short run relationship as shown by the vector error correction model revealed that market capitalization had a positive relationship with economic growth in the short run as well as the all share index and the rate of exchange and the inflation rate.
- The granger causality test revealed that a bidirectional causation exist between gross domestic product and market capitalization, a bidirectional causation exist between all share index and gross domestic product, exchange rate and gross domestic product, while a unidirectional causal relationship was established between inflation rate and the gross domestic product.
From the findings of the study above, we can draw some conclusions that the Nigerian capital market has not yet reached the stage where it can be described as a developed capital market, this is evident from the negative long run relationship it has on economic growth in Nigeria. The capital market in many countries is seen as the engine room that drives economic development since both the public and private sector can raise funds for both medium and long term development.
The capital market in Nigeria is however dominated by multinational firms who raise capital for investment purposes but the proceeds from these investments are repatriated to the parent country. By this investment funds elude local firms who have the potential to develop the nation.
In the light of the above findings, the study recommends the following;
- In the first place, the study recommends that the capital market in Nigeria be developed through efficient management and adoption of international best practices to ensure the safety of investors’ funds and boost confidence in the Nigerian capital market.
- In the second place, the study would recommend that local companies who have met the requirement for listing on the Nigerian stock exchange be encouraged to enlist and raise capital so as to discourage capital flight.
- In order to make the stock market more stable and reduce the vagaries of its performance, the manpower and processes of the Securities and Exchange Commission (SEC) should be further strengthened. This should enable the organization improve on its oversight function of the capital market and engender improvement its performance.
- Government and government agencies should use the findings of this study to make regulations that will benefit the investing public. If Government and its agencies such as Securities and Exchange Commission do not do that, there will be no confidence in the capital market. Lack of confidence will impair funds flow to the market.
- Lastly, the study recommends that the government put in place strong policies that will stimulate the operations, performance and development of the Nigerian capital market.
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