Stock Market Development Indicators And Economic Growth In Nigeria

Stock Market Development Indicators And Economic Growth In Nigeria

Abstract

This study investigates the empirical relationship between stock market development and economic growth in Nigeria, using data on gross domestic product, market capitalization ratio, value traded, turn over ratio, new issues, and banking sector development from 1981 to 2008. The data used for this study are secondary data on the Nigeria economy and the Nigerian stock market covering the period of 1981-2008. The results obtained show that market capization ratio and new issues exert a positive but insignificant influence on the growth of the stock market in Nigeria. The variables, bank sector development being significant may indicate that inflation due to excess money supply in the economy has an overbearing negative effect on growth and may in turn lead to the slow growth of stock market. Increasing public knowledge about the functioning as well as the benefits of the market could also promote its development.

Chapter One

Introduction

1.1 Background of the Study

Stock markets may affect economic activity through the creation of liquidity. It contributes to economic development by enhancing the liquidity of capital investments. Many profitable investments require a long-term commitment of capital, but investors are often reluctant to relinquish control of their savings for long periods. Liquid equity markets make investment less risky–and more attractive–because they allow savers to acquire an asset–equity–and to sell it quickly and cheaply if they need access to their savings or want to alter their portfolios. At the same time, companies enjoy permanent access to capital raised through equity issues. The Nigerian capital market needs to play the role of an enabler for the transformation of the Nigerian economy, by becoming the first port of call for domestic savings and for international investors (Oteh, 2010).

Until recently, the literature has focused mainly on the role of financial intermediation in the process of economic growth and capital accumulation.

1.2 Statement of the Problem

The role of the stock market to mobilize longterm fund to be channeled manufacturing industrial development. Despite the relative dynamism and

vitality observed in the evolution of the Nigerian capital market, empirical literature however suggests that the efficiency at effectiveness of the market in

promoting industrial development may be greatly limited as evidenced by the low level of the contribution of the industrial sector to overall market capitalization. The problem of this study is to ascertain the correlation between stock market and industrial development in Nigeria.

1.3 Objective of the Study

This research work titled “Stock market growth of manufacturing sector 1999-2013” is aimed at:

1. Evaluating the role of Nigerian stock market on the development of Nigerian manufacturing industry from 1999 to 2013.
2. To examine the impact of Nigerian stock market on the development of Nigerian economy.
3. To determine the relationship between the stock market and Nigerian manufacturing industry.
4. To examine the various problems associated with Nigerian stock market.
5. To also proffer possible solutions to the problems identified.

1.4 Research Question

The researcher formulated the following research questions:

1. What are the roles of Nigerian stock market on the development of Nigerian manufacturing industry
2. What are the impacts of Nigerian stock market on the development of Nigerian economy.
3. Is there any relationship between the stock market and Nigerian manufacturing industry.
4. What are problems of Nigerian stock market.

1.5 Research Hypothesis

For the researcher to carryout extensive study on the subject matter, the following research hypothesis were formulated:

1. Ho: The Nigerian stock market has not played any role in the development of Nigerian manufacturing industry from 1999 to 2013.
   H1: The Nigerian stock market has played significant role in the development of Nigerian manufacturing industry from 1999 to 2013.
2. Ho: Nigerian stock market has no impact on the development of Nigerian economy.
   Ho: Nigerian stock market has significant impact on the development of Nigerian economy.
3. Ho: There is no relationship between the stock market and Nigerian manufacturing industry.
   Ho: There is significant relationship between the stock market and Nigerian manufacturing industry.

1.6 Significance of the Study

This research work will be of immense help to:

1. The Researcher: it will help the researcher to know more on the impact/role of the stock market on the manufacturing industry.
2. It will also be of great importance to stake holders as it will enrich their knowledge on the relevance of the stock market in the development of the manufacturing industry.
3. This will equally be of help to companies and banks, when they abide by the recommendations provided by the researcher it will help them in time of decision making.
4. This study will be of great importance to the country Nigeria as it will help the policy makers in terms of enacting law.

1.7 Scope and Limitations of the Study

The study shall focus on stock market growth of the manufacturing sector 1999-2013.

The researcher in carrying out this study encountered numerous problems, which includes:

Fund:

This included lack of enough fund to move around and visit the organizations, the researcher has to visit the organizations more than two times, the researcher equally needed enough money to source material which constitutes an impediment. High cost of transportation in the city due to long distance also imposed its own limitation on the researcher.

Lack Of Research Materials:

Lack of research materials was also one of the problems faced by the researcher in the cause of this research work.

Responds Of The Respondents:

Another constraint to the researcher is that some of the respondents found it difficult to express their view with regards to the subject matter.

From the above points the researcher tried her best to bring out in detailed study on stock market growth of the manufacturing sector 1999-2013 but the above constraints have limited the researcher to only Enugu state.

Chapter Five

Summary, Recommendations and Conclusion

5.1 Summary of Findings

This study investigates and analyzes the empirical relationship between stock market development and economic growth in Nigeria, using data on gross domestic product, market capitalization ratio, value traded, turn over ratio, new issues and banking sector development from 1981 – 2008. The study got the following findings:

1. Stock market capitalization ratio is positive both in the short-run and long-run but it is not significant in explaining economic growth in the Nigeria economy. This suggests that the Nigerian stock market is still relatively small in size.
2. The value traded is positive in the short run but negative in the long-run. This may be attributed to structural rigidities in the economy as well as low volume of transactions in the market which adversely affect liquidity and thus growth. Moreover, the negative sign of the value traded may also result from frequent intervention by the regulatory super structure in the market which acts as a disincentive to investors who may want to profit from exchanging their holdings as frequently as market conditions permit.
3. The turnover ratio is positive in the long run but does not have a significant long run relationship with economic growth. This implies that the turn over ratio is not significant in explaining economic growth in Nigeria.
4. Although new issues is negative in the short run, its long-run result came out positive, thus conforming to apriori expectations. However, new issue is insignificant in explaining economic growth in the long run. Hence, it can be said that the stock market has not been effectively used by the public and private sectors as a source of raising capital for investment. Basically, investors have continued to source for fund from the money market due to its dominance of the financial system as well as the high cost of raising fund through the stock market.
5. Banking sector development is negative both in the short-run and long-run. The non-conformity of banking sector development is as explained in Section 4.3.

On the whole, the result obtained shows that market capitalization ratio, new issues and turnover ratio exert a positive but insignificant influence on economic growth in Nigeria. On the other hand, value traded and banking sector development negatively influence economic growth in the long run. This contrasting finding may be a reflection of the structural rigidities in the Nigerian economy which make the stock market a more of an appendage of the government institutions rather than a market driven by the forces of demand and supply. The variables, banking sector development being significant may indicate that inflation due to excess money supply in the economy has an overbearing negative effect on growth and may in turn lead to the slow growth of the stock market.

5.2 Recommendations

The inability of the Nigerian stock market to significantly impact positively on growth of the Nigerian economy is indicative that the market is still underdeveloped. However, based on over bearing evidence from empirical literature, the market may significantly contribute to growth of the economy if well developed and harnessed.

Hence, the following recommendations are made:

1. Given that the stock market operates in a macro-economic environment which invariably affects its performance and development, the government should take steps to create an enabling environment in order for the market to realize its full potential. The macro-economic environment should be characterized by low and predictable rates of inflation as well as consistent and sound fiscal, monetary and exchange rate policies.
2. Creating incentives for companies (especially those of minimum size) to seek quotation in the stock market. This will increase the number of securities available for trading on the exchange and improve the size of the market.
3. The stock market is known to be a relatively cheap source of funds when compared to the money market and other sources. The cost of raising funds in the Nigerian stock market is however regarded to be very high. There should be a review downward of the cost, so as to enhance and improve its competitiveness and attractiveness as a major source of raising fund.
4. The determination of stock market prices should be deregulated. Market prices should be allowed to operate without any hindrance as interference with security pricing is inimical to the growth of the market.
5. Investors should be allowed to profit more from their investment. This can be achieved by allowing some amount of speculation in the market. Also, investment analyst and advisers should be encouraged to render in-depth financial and investment analysis on a regular basis.
6. Increasing public knowledge about the functioning as well as the benefits of the stock market could also promote its development as this can help increase the investor base and improve the liquidity of the stock market. Knowledge about stock market activity can be improved through regular and intensive education programs.
7. Considering the benefits being enjoyed by the stock market through the internationalization of its operations, there should be increased effort at further internationalizing the market. Also, specific efforts should be made to attract more foreign capital flow (especially portfolio investment) into the market and encourage more foreign participation in the market.
8. Policy makers should set up ethical principles and standards of honesty, fairness, equity, diligence, competence and integrity for market operators. Also, upward review of minimum capital requirement for securities firm should be established to avoid distress and facilitate the honouring of their obligation.
9. Increased effort should be made at incorporating latest technology into stock market operations. This will help to improve market liquidity, transparency and investors confidence.

5.3 Conclusion

That stock market promotes economic growth is not in doubt. It serves as an important mechanism for effective and efficient mobilization and allocation of savings, a crucial function for an economy desirous of growth.

This study attempted to place this role in the Nigerian context between the period of 1981 and 2008. By the use of some notable stock market development indicators, the relationship between stock market development and economic growth was found to be positive though insignificant. This suggests that for significant growth, the focus of policy should be on measures to promote growth in the stock market.

The Nigerian market has a bright prospect given the recent policy direction especially the abrogation of all laws that hitherto hamper its effective and efficient functioning. Also, the internationalization and the improvement in the infrastructural facilities in the market in line with what obtains in the developed market as well as the present democratic dispensation will all work individually and jointly to the prospect of the stock market.

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