Stock Market Capitalization And Interest Rate In Nigeria
This study examines the relationship between stock market capitalization rate and interest rate. Time series data obtained from Central Bank of Nigeria (CBN) and Nigerian Stock Exchange (NSE) were analyzed using simple linear regression. Results showed that the prevailing interest rate exerts positive influence on stock market capitalization rate. Government development stock rate exerts negative influence on stock market capitalization rate and prevailing interest rate exerts negative influence on government development stock. It was therefore recommended that the operators of the Nigeria capital market should raise the level of awareness so that investors will be abreast with the happening in the market.
1.1 Background of the Study
It is a known fact that the investment that promote economic growth and development requires long-term funding, or longer than the duration for which most savers are willing to commit their funds. Capital market is a collection of financial institutions set up for the granting of medium and long term loans. Government securities corporate bonds are also traded here in the market, investors provides long-term funds in a bid to secure long term financial assets offered by borrowers. The capital market is made up of two (2) types of market: the primary and secondary market.
The participants in the capital include: Nigerian Stock Exchange, Discount Houses, Development Banks, Investment Banks, Buildings Societies, Stock Broking Firms, Insurance and Pension Organization quoted firms, the government, individuals and the Nigerian Stock Exchange (NSE) savings and real investment is therefore encouraged through the operations of the capital market. This is because aggregate savings are channeled into real investment that increases capital stock and therefore economic growth of the country.
Capitalization rate is the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The determination of this rate is based on the forces of demand and supply: interest rate is a part of the monetary policy. If interest’s rate paid by banks to depositor is increased, investors will patronize the banks the more and fewer investors will invest on the capital market. This will lead to a decrease in capital investment in the economy and hence economic growth and development will be lowered.
Thus, the disparity in the determination of interest rate and capital rate by different forces must have influence on the development and growth of the economy. These influences constitute the major problem that this study intends to investigate. The variation in the interest rate might cause investors also to either go to bank or buy government development stock (bond) thereby helping in the development of the economy.
1.2 Statement of the Research Problem/ Question
This research will direct itself towards providing answers to the following questions.
- Is there any significant relationship between interest rate and stock market capitalization rate?
- Is there any significant relationship between government development stock rate and stock market capitalization rate?
- Is there any significant relationship between interest rate and government development stock?
1.3 Objectives of the Study
This research is committed to establishing the relationship that exists between prevailing interest rate, stock market capitalization and government development stock rate. Specifically, the following are the objective of the study:
- To identify the type of relationship that exists between interest rate and stock market capitalization rate.
- To critically examine the relationship between government stock rate and stock market capitalization rate
- To examine the relationship between interest rate and government development stock rate.
1.4 Research Hypotheses
For the successful completion of the study, the following research hypotheses were formulated by the researcher;
- H0: there is no type of relationship that exists between interest rate and stock market capitalization rate
H1: there is type of relationship that exists between interest rate and stock market capitalization rate
- H02: there is no relationship between government stock rate and stock market capitalization rate.
H2: there is relationship between government stock rate and stock market capitalization rate
1.5 Significance of the Study
The Nigerian stock market constitutes a vital organ of our modern socio-economic system, is characterized by large-scale production requiring huge capital. The study hopes to contribute to the wealth of knowledge and enlighten interested and relevant stakeholder on the significant relationship between interest rate, stock market capitalization rate and government development stock. By the end of this study, it is hoped that all participants in the stock market will appreciate the relevance of prevailing interest rate on stock market capitalization as well as government development stocks.
1.6 Scope and Limitation of the Study
This study employs a time series analysis to examine the effect of interest rate on other variables such as stock market capitalization rate and government development stock rate obtained from 1999-2008 and from Nigeria. The researcher encounters some constrain which limited the scope of the study;
a) Availability of Research Material:
The research material available to the researcher is insufficient, thereby limiting the study
The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.
c) Organizational Privacy:
Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities.
1.7 Definition of Terms
A stock market, equity market or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as those only traded privately
Capitalization, in accounting, is when the costs to acquire an asset are expensed over the life of that asset rather than in the period it was incurred. In finance, capitalization is the sum of a corporation’s stock, long-term debt, and retained earnings. Capitalization also refers to the number of outstanding
The proportion of a loan that is charged as interest to the borrower, typically expressed as an annual percentage of the loan outstanding.
1.8 Organization of the Study
This research work is organized in five chapters, for easy understanding, as follows.
- Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study.
- Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature.
- Chapter three deals on the research design and methodology adopted in the study.
- Chapter four concentrate on the data collection and analysis and presentation of finding.
- Chapter five gives summary, conclusion, and recommendations made of the study
Summary, Conclusion and Recommendation
It is important to ascertain that the objective of this study was to ascertain stock market capitalization and interest rate in Nigeria. In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenges of stock market capitalization and interest rate in Nigeria
This study was on stock market capitalization and interest rate in Nigeria. Three objectives were raised which included: To identify the type of relationship that exists between interest rate and stock market capitalization rate, to critically examine the relationship between government stock rate and stock market capitalization rate, to examine the relationship between interest rate and government development stock rate. In line with these objectives, two research hypotheses were formulated and two null hypotheses were posited. The total population for the study is 200 staff of CBN, Abuja. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made of human resource managers, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
From the findings, results showed that, there is strong relationship measured above ninety-one percent (91%) between stock market capitalization and the performance of the Nigerian economy. As such the recapitalization exercise in the financial system as measured has stimulated growth in the economy, causing the market to respond to the forces of demand and supply. Arising from such performance, the Nigerian stock market is one of the strongest in Africa and also the best emerging market in the world. Therefore with protected legal frame work, the stock market is capable of stimulating expanded economy for economic growth and development.
- For the stock market capitalization to achieve better performance to regain its 2007 glory, when for the first time market capitalization hit over ₦ 13 trillion; the federal government should set up a stimulus account to boost up the market, so that the stock broker and stakeholders can access the funds, for more investment.
- More innovative formal looking regulations and reforms should be enforced in the sub-sector. Besides proactive supervision, modified legal framework and institutional drivers of growth and development should be given rightful attention.
- The federal government of Nigeria should use its power to enforce decree no. 45 of 1999 for the establishment of other stock exchange like the commodity exchange to compliment the effort of the stock exchange.
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