Stock Market Capitalization On Private Domestic Investment is a research work that provides solutions to the stock market and promotes growth of private domestic investment of a nation.
1.1 Background to the Study
In both developed and developing countries, it has been discovered that there is a direct linkage between the capital market of a nation and the growth of private domestic investment (Nwankwo, 2001, Olowookere & Osunubi, 2007, Kalu, 2009, Nwachukwu 2009 in Oluoze, 2011). Since the capital market reform indicates stability in the growth of private domestic investment in the economy and instability of capital market indicates instability in the private domestic investment of any country, Nigeria capital market reform and its impact on the growth of private domestic investment cannot be left out. Undoubtedly, despite the structural reform carried out by Nigerian government, Nigeria is still saddled with number of economic maladies. Among these problems are low level of savings and investment, high rate of inflation, widespread poverty and highly level of unemployment. This situation has increased so many researchers who have described the reforms woes rather than blessing. The expected role of private domestic investment as an engine of growth never materialized and the major expansion in private domestic investment needed to sustain economic growth is yet to be achieved. Indeed, investment promotes economic growth and development requires long-term funding, far longer than the duration for which most savers are willing to commit their funds. Capital market is a collection of financial institution set up for the granting of medium and long term loans (Ologunde, Elumilade & Asadu, 2006). It is a market for government securities, for corporate bonds, for mobilization and utilization of long- term funds for development the long- term end of the financial system. The capital market is the prime motor that drives any economy on its path to growth and development because it is responsible for long-term growth capital formation. Thus capital market is a market where medium and long-term finance can be raised. It is a market that offers a variety of financial intermediaries that enable economic agents to pool, price and exchange rate. In this market, lenders (investors) provide long term funds in exchange for long- term financial assets offered by borrowers. The market covers both new issues of stocks in the primary market and the sale of existing stocks in the secondary market. Such securities might be raised in an organized consortium under writing, syndicated loans and project financing. It is a mechanism whereby economic unit desirous to invest through surplus funds, interact directly or through financial intermediaries with those who wish to procure funds for their businesses. The money market only complement the capital to support gross fixed capital formation unfortunately the Nigeria capital market has not fully performed its natural function of funding investment. One of the major indicators of capital market development is the proportion of long term fixed capital that is raised in relation to gross domestic product. Between 1999 and 2004, capital formation in terms of long-term funds formed the market through which new issues of securities to the gross domestic product averages only 1.36 percent while the new issues to gross fixed capitalization to gross domestic product averaged 14.25 percent during the same period (Adedinran, 2012). In Nigeria, the establishment of formal capital market is dated back to 1961. Since its inception, the Nigerian capital market has witnessed some phenomenal growth as evidenced in the expansion in the volume of transactions, a number of quoted companies, market capitalization, market participants and a good enabling environment facilitating the mobilization of domestic funds for investment (Edo, 2009). The capital market is therefore very important to any economy because it encourages savings and real investment in any healthy economic environment. It is basically an aggregation of institutions and mechanisms through which long term funds are mobilized for investment (domestic or foreign) investment. It is a highly specialized and organized markets and an essential agent of economic growth because of its ability to facilitate and mobilize domestic savings and investment. Through the market, aggregate savings are channeled into real domestic investment that increases the capital stock and economic growth of the country. More so, the capital market synchronize the divergent preferences for portfolio manager and financial institutions and those of domestic savers by mobilizing long term funds for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market without effecting the operation of the firm, their saving had earlier financed.
Although a small market by international standard the Nigeria capital market is one of the leading markets in sub-Saharan Africa and has made some notable strides in recent years. With a history of over 67 years when the first public issue was floated at N600,000 (more than 300,000 pounds sterling) worth of government stock and 53 years of stock exchange, equity listings and market capitalization and still relatively small, standing at 216 United States dollars (N0.7 billion), a much lower figure than market capitalization, as a result of this, federal government of Nigeria development loan stock was issued in line with its role of fostering economic and financial development. In 1986, Nigeria embraced the International Monetary Fund (IMF) Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s. The programme was proposed as an economic package to rapidly and effectively develop the Nigerian economy. However, the turnover ratio of 7.9 percent on domestic investment was recorded at the end of 2002, higher than the average turnover ratio for 1998- 2002 (Ndanusa, 2003, Ozoh, 2011). From a historical perspective, the figure excepting for 2011 is an improvement, evidencing the continued rise in activities of the market. The development of the market has been induced by the government. Though prior to the establishment of stock market in Nigeria, there existed some less formal market arrangements for the operation of capital market. According to CBN (2011), the market has been quite active improvement with traded equities of N19.8 billion (US$178 million) in January 2009 which represented about 28 percent of the total equity value in 2008. The depreciation of the currency, the naira has continued to impact on the size of the market in dollars terms. Between 1997 and 2002, the naira lost over half its value to the dollar. As a result, while capitalization witnessed impressive growth in local country terms, this was not the case in dollar terms as a much slower growth was registered. The capital market has not been a popular source of funds in Nigeria because of the instability in the economy, low yields to domestic investors in capital market instrument and government overbearing presence in economic markets. Indeed, the introduction of SAP in Nigeria has resulted in significant growth of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market. The liberalization of capital market led to the growth of the Nigeria capital market, its impact at the macro-economic level was negligible. Again, the capital market was instrumental to the initial twenty-five domestic banks that were able to meet the minimum capital requirement of N25 billion during the banking sector consolidation in 2005. The stock market has helped the government and corporate entities to raise long-term capital for financing new projects and expanding and modernizing industrial/commercial concerns.
Financial institutions have not contributed much in financing capital investment but they have contributed towards market development (Mary et al; 2013). Equity market capitalization grew by over N100 billion (US$ 16.1 billion) or 15 percent and has remained on the upward swing in the year 2010. This trend has continued such that following recapitalization of the banking sector, the market capitalization has doubled its 2002 value by the end of 2006.
1.2 Statement of the Problem
There is now growing evidence that the Nigerian capital market has witnessed tremendous growth over the past few decades. The central bank of Nigeria (2012) notes that the Nigerian Stock Exchange all sector index recorded a significant improvement during the years (2004, 2006 and 2010). At 21,222.6 equity (1984=100), the index grew by 74.8 percent at the end of 2004 compared to 10.7 percent in 2003. With all sectors contributing to the issues in 2003 alone, the market considered and approved 26 applications for new issues valued at N185.0 billion, as against 27 applications for new issues valued at 1468.6 billion in 2002. Between 1999 and 2005, there was a phenomenal increase in total market capitalization of quoted companies. For example, total market capitalization was N294, 104,495.69 in 1999 and by 2005, it had risen to N132, 489.7 (CBN, 2006). In 2010, there was a clear indication that a long-run relationship exists between capital market and private investment in Nigeria.
The study is therefore informed by two main reasons: first, now that the Nigeria capital market has come a long way for the past two and half decades, what effects does it have on private investment in Nigeria? Unfortunately, data on private investment in Nigeria have failed to show convincing correlation with the unprecedented growth of the capital market, for example the ratio of private fixed capital formation to GDP has shown a downward trend since 1980. The ratio was 0.19 in 1970, 0.25 in 1973 and decreased to 0.18 in 1980. Since 1984, the ratio has been less than 10 percent for most of the period between 1984 and 2010. One therefore wonders if there is any link between capital market development and the growth of private domstic fixed capital formation in Nigeria. Secondly, though available literature both theoretical and empirical has failed to agree on the impact of capital market on private domestic investment and consequently on economic growth, few studies relate capital market development to private investment growth in Nigeria. The most recent study (Kolapo and Adaramola, 2012) focuses on stock market capitalization and economic growth in Nigeria. The study is, therefore, using econometric techniques aimed at addressing the above issues raised namely, the Impact of Capital Market on the Growth of Private domestic Investment in Nigeria and the controversy surrounding the growth of capital market and in investment growth via the growth of private domestic investment in Nigeria.
1.3 Research Questions
The study will be guided by the following research questions;
1. Does stock market capitalization have significant effect on the growth of private domestic investment in Nigeria?
2. Does value of total transaction in the capital market have significant effect on the growth of private domestic investment in Nigeria?
3. To what extent can credit to private sector explain variations in private domestic investment in Nigeria?
1.4 Objectives of the Study
The broad objective of the study is to investigate the impact of capital market activities and developments in private domestic investment in Nigeria. More specifically to:
1. determine how stock market capitalization affects the growth of private domestic investment in Nigeria.
2. ascertain if value of transactions has significant effect on the growth of private domestic investment in Nigeria.
3. ascertain the extent to which credit to private sector explain variations in private domestic investment in Nigeria.
1.5 Research Hypotheses
The major hypotheses that will be tested in the course of this study are stated in the null form as follows,
1. Stock market capitalization does not have any significant effect on the growth of private domestic investment in Nigeria.
2. Value of total transaction in stock market does not have significant effect on the growth of private domestic investment in Nigeria.
3. Credit to private sector has no significant effect on private domestic investment in Nigeria.
1.6 Significance of the Study
Previous studies conducted which are similar to the study have devoted much attention on developed countries as well as other developing countries like Asia (Lynch, 1995, Pilgrim & Schich, 2010, and Omoke, 2012). However, results from these studies cannot be attributed to such sub-Saharan Africa which has unique institutional and structural characteristics. Moreover, few studies that exist on sub-Saharan Africa are mostly based on cross-country evidence (Mary et al; 2012, Misati 2006) which have tended to capture the effect of the entire financial system on investment. The study empirically distinguishes the role played by capital market on the growth of private investments as a component of total investment controlling for country specific objectives. More importantly, this work is premised on the need to examine the relationship between capital market and private domestic investment in Nigeria. The researcher believes therefore, that the outcome of this research will contribute to the field of knowledge. The researcher also underlines its importance to policy formulation and implementation for government at all levels. The findings of this research and the recommendations contained therein will form a robust working material for researchers, government agencies, private institutions as well as academics. The study will help the policy marker to draw a conclusion on where to strengthen the effort of capital market in areas of private domestic investment in Nigeria. This work will be a major contribution to existing empirical literature in this area of study.
1.7 Scope and Limitations of the study
The impact of capital market activities and developments in private domestic investment in Nigeria is restricted to the period between 1995 -2013. The study is limited to the six geographical regions in Nigeria. The variables inclusive are, Gross domestic investment as a proxy for private domestic investors, Market capitalization, Private domestic stock and domestic credit to private domestic investors.
REVIEW OF RELATED LITERATURE
2.1 Theoretical Review
The review on investment abounds with the description of the determinants of private domestic investment and channels which such variables affect investment. The traditional neoclassical theory, which is also the Q-theory of capital formation, is the ratio of the market value of existing capital stock to its replacement cost (the Q ratio) and is the main force driving investment and growth. Tobin argues that the delivery lags and increasing marginal cost of investment are the reasons why Q would differ from unity. Tobin Q also argues on a role for the value of the firm. In neoclassical, Jorgenson (1963, 1971), postulated the role of cost of capital, the accelerator model which postulated the role of rate of change of output, the Tobin Q theory which argues on a role for the value of the firm. Gablis (1979) emphasizes on neoliberal approach as the importance of the financial repression framework and high interest rates in stimulating growth due to McKinnon (1973), Shaw (1973) and Onah (2011) and so on. The core of their argument rests on the claim that developing countries suffer from financial depreciation which is generally equated with controls in interest rates in a downward direction and that if these countries were liberated from the repressive conditions would induce savings, investment and growth. Not only will liberalization increase savings and loan able funds, it will result in a more efficient allocation of these funds both contributing to a higher private domestic investment.
In neoliberal view investment is positively related to the real rate of interest in contrast with the neoclassical theory. The reason is that a rise in interest rates increases the volume of financial savings through financial intermediaries and thereby raises investible funds; a phenomenon that McKinnon calls the Conduit Effect. Thus, while it may be true that demand for investment declines with the rise in the real rate of interest, realized investment actually increases because of the greater availability of funds. This conclusion applies only when the capital market is in disequilibrium with the demand for funds exceeding supply. The standard model of business fixed investment is called the Neoclassical Model of Investment (Mankiw, 2003). Jorgenson (1983) examines the benefits and cost of firms of owing capital goods. The model shows how the level of investment in addition to the capital stock is added to the marginal product of capital, the investment rate and the tax rules affecting firms. The model shows the economic incentives that lie behind the firm’s investment decision. According to the model, the firm’s decision regarding its capital stock depends on whether owning and renting out capital is profitable. The model holds that the charge in the capital stock called net investment depends on the difference between the marginal product of capital and the cost of capital. If the marginal product of capital exceeds the cost of capital, firms find it profitable to add to their capital stock. If the marginal product of capital falls short of the cost of capital, they let their capital stock shrink.
Basic Investment Theory emphasizes on the decision to invest in a central subject in the analysis of economic behaviour mainly because it determines the accumulation of productive capacity and hence the future growth path of the economy. Earlier observations also showed that investment is one of the most volatile components of the economy, adding interest and challenge for theories that attempt to explain domestic investment behaviour. The oldest and most familiar explanation came from the Theory of User Cost of Capital where the firm maximizes its market value by adjusting its capital stock to a point where the marginal value product of capital equals the market interest rate. This theory is underpinned by diminishing marginal product of capital in a convex production function which postulates demand for private domestic investment goods to decline with an increase in interest rate (the user cost of capital). Extensions to the user cost were easily made by incorporating fiscal incentives like taxes on profits and investment tax creditors to make it more realistic. User cost theory however says little or nothing about what determines the marginal value product of capital. A major reason behind the volatility of the investment is arguably the uncertainty that surrounds its expected profitability. How expectations are formed is however a contentious issue in economics. On a more formal basis shifts in investor expectations are supported to be founded on economic fundamentals including observed shifts in technology, consumer demand, opinion surveys and the like. They could also occur for inexplicable attitudes of pessimism or optimism affecting economic agents throughout the economy. Keynes (1936) was the most prominent of those who subscribed to the latter notion and he attributed fluctuations investment to animal spirits of investors than to a meticulous calculation of future streams of profit weighted by their respective probability of occurrence.
The neoclassical flexible accelerator model suggested by Jorgenson (1967) combines the user cost of capital (interest rate, depreciation and price of capital goods) and the accelerator effect to explain domestic investment behaviour. Subject to lags and costs involved in adjusting the capital stock, a competitive firm in the neoclassical model is assumed to operate under perfectly competitive product and factor markets which implies inter alia absence of liquidity constraints (to adjust capital stock) and a general equilibrium situation with full employment.
Consequently, the theoretical models highlighted above were essentially formulated to analyse private domestic investment behaviour of firms in industrial economies with none of them so far decisively proved to be superior to the other. Direct application of these models except the simple accelerator model to understanding private domestic investment behaviour in developing countries was the most difficult for two reasons. The first is technical and relates to scarcity of data on key variables such as wage rates, capital stock, real interest rates and stock market prices. The second one relates to the incompatibility of the institutional and structural peculiarities of developing countries with the underlying assumption of the basic models such as perfectly competitive markets, little or no government investment and absence of liquidity constraints.
Earlier, studies on private domestic investment in developing countries thus opted to move away from the traditional theories and placed emphasis on the role of financial sector development. They highlighted the fact that financial markets in developing countries are typically repressed and firms are credit rationed constraining their ability to adjust capital to a desired level. More specifically, limited access to credit forces firms in developing countries to accumulate enough real balances before initiating investment prospects. Mckinon (1973) and Shaw (1973) provided the theoretical and empirical framework for such analyses and they argued that the level and quality of private domestic investment in developing countries is positively associated with the real interest rate on deposits. This proposition was in contradiction with the neoclassical model where interest rate is treated as the user cost of capital. Therefore, lacking the privilege of a full-fledged theoretical model applicable to their context, the empirical literature on the determinants of private domestic investment in developing countries tended to start off with the neoclassical model and attempt to reformulate it by incorporating variables that are supposed to have strong association with domestic investment. Such studies are essentially exploratory in nature and often based on reduced form of cross-country regressions rather than a theoretical model firm level analysis. In recognition of the high import content of intermediate and capital goods in developing countries as well as the universality of the devaluation in adjustment programmes, the real exchange rate is often included in the investment model. In the long-run, real devaluation is expected to lead to an increase in investment in the traded goods sector and a decrease in the non-traded goods sector with ambiguous overall effect (Agenor and Montiel, 1996). In the short run, an expected real devaluation under restricted capital mobility and high import content of capital goods is supposed to lead to an investment boom as the expected depreciation leads to a switch of foreign goods. Such a boom must also subside after the actual devaluation due to the associated increase in cost of imported goods. The sharp fall in investment rate in many developing countries following the debt crisis of the early 1980s led to the inclusion of debt burden as a key deterrent of private investment. Debt overhang is expected to discourage investors as they anticipate confiscatory taxes to finance debt service in the future, hence making the expected returns on projects uncertain.
There are a number of hypothesis about the speed at which firms plan to adjust their capital stock overtime. The researcher singled out the gradual adjustment hypothesis or Flexible Accelerator Model (Dornbush, 1990, Samuelson, 1939, Hicks, 1950, Godwin, 1951). The basic notion behind the gradual adjustment hypothesis is that the larger the gap between the existing capital stock and the desired capital stock the more rapid a firm’s rate of investment. The hypothesis is that the firm’s plans to close a fraction, λ, of the gap between the desired and actual capital stocks each period, denoting the capital stock at the end of the last period by K,. The gap between the desired and actual capital stocks is K* – K_l. The firm plans to add to last periods capital stock (K-l), a fraction (λ) of the gap (K*-K-1) so that the actual capital stock at the end of the current period K will be K = K-1 + λ (K*- K-1). This equation states that the firm plans to have the capital stock at the end of the period, K be such that a fraction A. of the gap between the desired capital stock, K*, the capital stock, K-1 that existed at the end of the period, is closed.
To increase the capital stock from K-1 to the level of K indicated by the equation, the firm has to achieve an amount of net investment, 1 = K – K, indicated by the equation. Hence, net investment can be specified as l=λ, (K*-K-1) which is the gradual formulation of net investment.
Many economists (example, Tobin 1982) see a link between fluctuations in investment and fluctuations in the stock market. Stock price tend to be high when firms have many opportunities for profitable investment, since these profit opportunities mean higher future income for share-holders. Thus, stock prices according to Tobin reflect the incentives to invest. This is captured in the famous Tobin’s Q definition as,
Q = Market value of installed capital
Replacement cost of installed capital.
Q represents Tobin Q Theory of Capital Formation which is the ratio of the market value of the existing capital stock to its replacement cost. The “Q” ratio is the main force driving investment and growth. Tobin agrees that the delivering lags and increasing marginal cost of investment are the reasons why Q differs from unity. Tobin reasoned that net investment should depend on whether Q is greater or less than 1. If q is greater than 1, then the stock market values installed capital at more than its replacement cost. In this case, managers can raise the market value of their firm’s stock by buying more capital. Conversely, if q is less than 1, the stock market values capital at less than its replacement cost. In this case, managers will not replace capital as it wears out (Mankiw, 1997). That financial structure and economic development are interrelated as a well known hypothesis (see Goldsmith, 1969, Mckinon,, 1973, Shaw, 1973, Kuznets 1971, Cameroon 1967 and Townsend, 2008. see also Gertler, 2010 an excellent survey of the background and Greenwood and Jovanovich, 2010 for a recent contribution). In a recent book of Mckinon (2011), real firms views the first and advocated in his money and capital (1973) that financial liberalization in which real deposit rates are brought to a market clearing level can and indeed does lead to rapid financial deepening measured by the M2 to GDP ratio and financial growth can add, does contribute to higher GNP growth. As for the channels through which financial growth exerts a positive effect on output growth, Mckinon (1973 and 2011) and others (world Bank, 2012, CBN, 2012), put emphasis on the saving incentives and investment efficiency generated by financial Deepings. Overtime, more variables have been observed to affect corporate investment in one way or the other. (Busari and Omoke, 2010). For details on these variables, readers are referred to studies like Greene and Villanueva 1991) Delong and Summers (1991), Chibber, Dailamir and Shatik (1992), Serven and Solimano (2009), Bleaney and Greenaway 1993) and Ibara (2006).
The Capital Market Activities and Developments.
The literature on capital market activities and developments involve citing different contributions on what capital market is all about and what it means to follow in having a strong, viable and reliable market. Jhingan (2004) the capital market is a market which deals in long term loans. It supplies industries with fixed and working capital and finance medium term and long term borrowings of the central, states and local governments. Thus the capital market comprises the complex of institutions and mechanisms through which medium term funds and long term funds are pooled and made available to individual business and governments for economic development of the country. The capital market activities have been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies.
This is made possible through some vital roles played, such as channeling resources, promoting reforms to modernize the financial sectors, financial intermediation capacity to link deficit to surplus sector of the economy, and a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy (Pat & James, 2010).
Nwankwo (1998), Capital Market activities comprises the complex of institution and mechanism through which intermediate term funds and long-term funds are pooled and made available to business, government and individual. There also asserted that the ‘capital market activities comprises the process by which securities already outstanding are transferred. This expression contains the fact that the capital market has no fixed location and deal on medium and long-term funds, which has government, individuals and business firms as participants and ensures liquidity at as provides market for both new and old securities. Also, the central task of the capital market activity is the mobilization of funds in the hands of individuals who save pool and channel such funds into productive uses.
The Nigerian Capital Market
The capital market is cornerstone of every financial system since it provides the funds needed for financing not only business and other economic institutions, but also the programme of government as whole. The capital market is essentially a market for long term securities that is stock, debenture and bonds lasting for usually longer than three years. The proper functioning of the capital market was not set up until the establishment of the Central Bank in 1959 and launching of the Lagos stock exchange in 1961 even though securities were floated as far back as 1946. The needs to have an organized stock exchange came up and committee was set up by the government under the chairmanship of Prof. R.W. Barbock to consider the feasibility of having indigenous forum for the purchase and sales of shares and stocks.
The Nigeria capital market was established for the following reasons below.
1. To overcome difficulties of selling government stock
2 To provide local opportunities and lending for long term purpose
3. To enable authorities mobilized long term capital for economic growth and development
4. To enable the foreign business the chance of offering their shares to interested Nigerians to invest and participate in the ownership of these foreign business.
In view of the above, the major participants in capital market are:
1 Government Quoted Companies (listed companies)
2 Stock Brokers
3 Central Bank of Nigeria (C.B.N)
4 Banking and non Banking Financial Institutions
5 Nigerian Stock Exchange
6 Nigerian Securities and Exchange Commission
Functions of the capital market
1. The promotion of rapid capital.
2. The machinery for mobilizing long-term financial resources for industrial development.
3. The provision of an alternative source of fund other than taxation for government.
4. The mobilization of savings from numerous economic units for growth and development.
5. The provision of liquidity for any investor or growth of investors,
6. The broadening of the ownership base of assets and the creation of a healthy private sector.
7. It is an avenue for effecting payment of debts .
8. The encouragement of a more efficient allocation of new investment through the pricing mechanism.
9. The creation of a built in operational and allocation efficiency within the financial system to ensure that resources are optimally utilized at relatively little cost.
10. It is a necessary liquidity mechanism for investors through a formal market for debt and equity securities.
Nigerian Security and Exchange Commission.
SEE MORE TOPICS.
The Nigerian security and exchange commission (NSEC) is the apex institution for the regulation and monitoring of the Nigeria capital market. The commission was established under the security and exchange commission decree 1979, operating retrospectively from 1st April 1978. Prior to the SEC, two bodies had in succession been responsible for the monitoring of capital market activities in Nigeria. The first was capital issues committee, which operated between 1962 and 1972. It could not be seen as the superintendent of the capital market because its functions were more or less advisory without the force of instruction even through its functions included the coordination of capital market activities. The next body was the capital market issues commission (CIC) which came into being in March 1973. The C.I.C, unlike its predecessor, had full powers to determine the price, timing and volume of security to be issued.
Despite this wider power, the CIC could not be seen as the apex of capital market because it concerned itself with public companies alone and its activities did not cover the stock exchange and government securities. The enabling Act of the Securities and Exchange Commission specifies its overriding objectives as investors’ protection and development while its functions were divided into two regulatory and development. The functions of the commission are extensively spelt out in Nigeria Securities and Exchange Commission Decree (Decree No 29) of 1983 and the Nigerian Enterprises Promotion Decree 1990. According to section (6) subsection (9) to (10) the commission is charged with the following duties and functions:
1. Determining the amount of price and time when securities of companies are to be sold to the public whether through offer for sale or subscription.
2. Registering all securities proposed to be offered for sale to or for subscription by the public.
3. Maintaining surveillance over the securities market to ensure orderly, fair and equitable dealing in securities.
4. Protecting the integrity of the security market against any abuses arising from the practice of insider trading.
5. Acting as regulatory apex organization for the Nigerian capital market including the Nigerian Stock Exchange and its branches to which it would be at liberty to delegate power.
6. Creating the necessary atmosphere for the orderly growth and development of the capital market.
7. Reviewing, approving and regulating merger acquisition and all forms of business combination.
8. Registering Stock Exchange or their branches, registers investment advisers, securities dealers and their agents and controlling and supervising their activities with a view to maintaining proper standards of conduct and professionalism in the securities business.
9. Undertaking such other activities as are necessary or expedient for giving fall effect to the provision of this decree.
The Nigerian Stock Exchange
As one of the constituencies of the capital market, the exchange is a private, nonprofit making organization, limited by guarantee. It was incorporated via the inspiration and support of businessmen and the federal government but owned by about 300 members. The membership includes financial institution, stockbrokers and individual Nigerians of high integrity, who have contributed to the development of the stock market and Nigerian economy. The Nigerian stock exchange started with the incorporation of the then Lagos stock exchange in 1960. Trading commenced on the exchange in after the enactment of the Lagos stock exchange Act of 1961, the self regulatory organization was subsequently reorganized and renamed the Nigerian stock exchange 1967, based on the report and recommendation of Pius Okigbo financial system review commission. The stock exchange is thus an institution of capital market, which provides trading floors where all dealing members operates on every business day. The exchange now has nine (9) branches and all the branches function principally as trading floor.
Functions of Nigerian Stock Exchange
1. To provide opportunities for raising new capital.
2. To promote increasing participation by the public in the private sector of the economy.
3. To provide appropriate machinery to facilitate further offerings of stocks and shares to the public.
4. To provide a central meeting place for members to buy and sell existing stocks and shares and for granting quotation to new ones.
5. To reduce the risk of liquidity by facilitating the purchasing and sale of securities. (Al-faki, 2007)
Capital Market Instruments
The instruments can be categorized into three major groups of securities. These are: ordinary shares, preference shares and Debt instruments.
1. Ordinary Shares
Herbert (2004), ordinary share is issued to owners of the company. They are long-term financing with a nominal value or face value. The memorandum and article of association of a company specified the number of authorized ordinary shares a company can issue. The ordinary shareholders of the company, their claims to income and assets come after the creditors and preference shareholders have been paid in full. As a result, a shareholder return on investment is less than the return to a lender or preference shareholder. However, there is no limit to the return of ordinary shares.
2. Preference Shares
Ukpata (2012), preference shares are major source of long-term financing of a company. The holders of preference shares are entitled to a fixed percentage dividend before any dividend is paid on ordinary shareholders. However, preference dividend can only be paid if sufficient distributable profits are available, although with cumulative preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to ordinary shares. For credibility sake, companies always try to pay the fixed dividend regularly.
3. Debt Instrument
Akpeti (2012), A bond represents a method of long-term borrowing by corporation of government agencies, when a corporate bond is issued, it is a legal contract that goes with it which contains the provision of loans in terms of its amounts, interest and maturity period. Bonds are sold in multiples. They are purchased by commercial banks, insurance companies, pension fund and even individuals. This form of financing is usually reserved for target companies or corporation. This is why they have prior claims on the firm’s asset in the event of liquidating.
Types of Capital Market
1. Primary Market
Soyede (2005), primary market is a market for new securities. It is a platform where the company or government can raise fresh funds for expansion. Both the Securities And Exchange Commission (SEC) and the Nigerian stock exchange (NSE) are involved in primary market activities. The issuing houses and stock brokers also play prominent roles. Until 1993, when deregulation of the capital market commenced, Securities and Exchange Commission was responsible for pricing and allotment of new issues in the Nigerian capital market while the quotation committee of the Nigerian stock exchange approved only issues which are to be listed on the exchange’s official list. The issuing houses and stockbrokers package issues for government and public companies. However, the central bank of Nigeria acts as issuing issues for federal government stocks when company wishes to sell such shares. If the company is already listed, the price is technically suspended to forestall any insider. This situation holds true reason for companies going into mergers and acquisition, or re-arrangement that may potentially have bearing on their price and the suspension is sustained by the Nigerian stock exchange until such exercise is completed (Onoh, 2013). For companies seeking listing for the first time, the securities are listed with the offer price soon after the offer exercise is completed, instrument representing ownership are dispatched to the shareholders. Securities and Exchange Commission was the sole body giving approval to offer price proposed by the issues in conjunction with issuing houses (Emenike, 2012). However, under the present dispensation, the issuing house proposes and defends a price at which it is willing to underwrite the entire securities to be issued. This becomes the offer price and entirely conforms to the price, while SEC examines the offer documents with a view to ascertaining the adequacy of price and conformity with statutory requirements among other things. The Nigerian stock exchange reviews the same documents to ensure that company or institution meets its listing requirements.Alice (1997), primary market takes into representation the issuance which could be in form of any of the following:
1. Offer for Sale
Public offers for shares in a company by existing shareholders proceeds of which goes to the vendors for publications. This is a system by which existing shares offer their shareholders or part of them for public subscription. In other words, offer for sale is a transfer of ownership of shares from existing shareholders to new shareholders
2. Offer for Subscription
This is a direct issue to the public by floating a number of shares of debenture stock. It carries the supposition that the company is a public one and the proceeds of the issues go to the company to finance expansion and/or modernization. Again, the company issues a prospectus inviting the public to its shares and it should be noted that the company cannot dictate who subscribes to its shares.
3. Stock Exchange introduction
Where a company seeking quotation already has enough shares held in public hands, the council of stock exchange may permit its security to be introduced into and listed on the market, no new or existing shares to be sold. The added marketability to raise fresh funds in the future invariably at a lower price.
4. Private Placement
Securities are sold to the client of the issuing houses handling the issue instead of being offered directly to the general public. This is often necessitated by the desire to save time and cost of issue. The council of the stock exchange seldom grants such permission and this method is utilized by quoted public limited company’s. This differs from offer from the subscription and offer for sale in that it is not an invitation to the public to subscribe, rather, the share or stocks are placed with a broker who then seeks out for the prospective purchasers.
5. Right Issue
This involves offer to buy more shares generally made to existing shareholders and at concessionary price. Applications are considered by quotations committee of the exchange for ratification and avoid excruciating interest rate charged in the money market the approval of the council gives the go ahead for the primary market activities before the commencement of the primary market activities, the securities and exchange commission is given the application to determine the offer price of the security.
2.1.7 Secondary Market
Secondary market enhances the new issue market in many ways. It provides the means by which investor can monitor the value of their shares and liquidate them when they wish to do so. Pandey (2006), it is a type of market where existing securities of a market are traded on daily and continuous basis. It is the market for the existing securities. This consists of exchanges and over the counter market where securities are bought and sold after their issuance in the primary market. It has little to do with influencing the way an economy allocates its capital resources or the way in which sailing surplus and savings deficit united with one another. However, events in the secondary market frequently provide the basis for the terms and conditions that will prevail in the primary market. If there were no secondary market in which investors could turn investments in new issues back into cash when they choose, many investors would not buy new issues in first place. If any investor truly intend to make any irrevocable commitment of their funds, the availability of a secondary market is an absolute pre¬requisite to the existence of a primary market in common stock. Hamilton (2012), the secondary augmentation of the flow of funds into the new issue market makes it possible for the economy to make long-term commitment in real capital. This point is best illustrated if the financial claims issued by firms and individuals could not be traded in the secondary market. The secondary market makes it possible for those who desire to make long-term real investments to obtain the money capital of savers who have no intension of committing themselves for long. Thus, they provide the economy with the opportunity to consider entirely new approaches to building its capital stock. Market capitalization is the market value of company’s issued shares capital. It is the product of the current quoted prices of shares and the number of shares outstanding,
Development in the Nigerian Capital Market
The finance and insurance sector is the one that has experience about the highest growth on the Nigeria economy especially since after the introduction of the Structural Adjustment Programme (SAP). This has positive implications on the activities of the capital market in Nigeria.
The total number of securities transacted in the capital market (both the first and second tier) was 334 in 1961. Of this, government securities were 92, a total of (27.5%) while industries were 242 (72.5%) of the total. In 1965, the total number of transaction increased to 1018 (204.79%) over the 1961 figure. Of this, industrial securities dominated with a percentage share of 61.6%. The number of transactions however dropped in 1970 to 643 (47.8%) of which were government securities. Again, the value of total transactions in the year was N16.6 million with government securities accounting almost the total value of (98.78%). Industrial securities through more in number were valued at only N0.2 million. From 1976, industrial share of both in number and value of transactions increased tremendously from 97.0 and 2.03% for 1990 to 97.3 and 3.29% for 1985 and 98.85, and 11.11% respectively in 1987. The sudden growth both in the total number and value of transaction in the market and in the share of industrial securities during these periods can be attributed to the positive effect of the Nigerian enterprises promotion decree as 282 securities made up of 19 government stock and bond, 49 industrial loans (debentures) or preferences. Sex companies were listed on this segment of the stock market by 1988 and by 2002 over twenty three companies had availed themselves of the opportunities offered by this market.
In 1985, there were 20 securities on the exchange official list and increasing to 290 as at the end of April, 2007. Although a small market is one of the heading market in sub Saharan Africa and has made some notable strides in recent years. With a history of over 50 years when the first public issue was floated and 42 years of a stock exchange, equity listings and market capitalization are still relatively small, standing at 196 and US $ 7.0 billion respectively at the end of March, 2003. The value of the equities traded at year end 2002 was US $ 0.5 billion, a much lower than market capitalization. Turnover ratio of 7.9 percent was recorded at the end of 2002, higher than the average turnover ratio for 1998 to 2002. The market has been quite active with traded equities of N10.8billion (US $ 86 Million) in January, 2003, which represented about 18 percent of the total equity value in 2002. By the end of March, 2003, N24 billion (US 188.9 Million) equities had been traded. Indeed, the depreciation of the local currency, the naira has continued to impact on the size of the market in dollar terms. Between 1997 and 2002, the naira lost over half its value to dollar, while market capitalization witnessed impressive growth in local currency terms. This was not the case in dollar terms as a much slower growth was registered. In 2002, equity market capitalization grew by over N100 billion (US $ 794 million) or 15 percent and has remained on the upward swing. In 2003, equity market capitalization rose by N98.2 billion (US $ 0.8 billion) over December, 2002. The movement in market capitalization has been led principally by new listings and firmer prices arising from positive market sentiments. In 2004, the stock index rose by 10.7 percent albeit lower than the price increase of 35.2 percent in 2003 and 54 percent in 2000. Thus, the five years average index growth of 33.3 percent was higher than the growth of inflation which averaged 12.6 percent during the same period. The expansion of the capital market is evident in the size of the market capitalization to gross domestic product (GDP). This shows that market capitalization represented 14 percent of (GDP) in 2002, in contrast to 12 percent in 2005, 9.4 percent in 1999 and 5.6 percent in 1992. The rising trend indicates that market capitalization is growing faster in percentage terms than the gross domestic product (GDP). The year 2002 was recorded year for the capital market with total floatation of N61.3 billion or US $ 0.483 million, the highest annual record ever posted in the capital market. This single year record surpassed the cumulative figure for the proceeding two years. It is also significant that the total value of flotation in year 2006 represented 36.4 percent of flotation in the ten year ended 2002. The commission actually received 46 new issue applications for N78 billion but only 33 applications had been cleared and opened by year-end. The 33 notation’s in 2004 compares favourably with 27 and 21 in 2001 and 2000 respectively. The listings have increased to over 290 securities as at 2007. (See, CBN, 2012, FOS, 2012)
Capital Market Development and Investment
In terms of theory, a growing literature argues that stock market provides service that boast economic growth. Specifically, Greenwood and Smith (1996), shows that large stock market can lower the cost of mobilizing savings and thereby facilitating investment in the most productive technologies. Bencivenga, Smith and Stan (2010) and Levine (2009), argues that stock market liquidity – the ability to trade equity easily is important for growths. Specifically, although many profitable investments require a long-run of capital, savers do not like to relinquish control of their savings for long period. Liquid markets easy this tension by providing an asset to savers that can quickly and inexpensively sell. Simultaneously, firms have permanent access to capital rise through equity issues. Kyle (2010) and Holmstorm & Tirole (2005) argue that liquid stock markets can increase incentives to get information about firms and improve corporate governance.
Theoretical disagreement exists about the importance of stock markets for economic growth. Mayer (2008), argues that even large stock markets are unimportant sources of corporate finance. Stigliz (1995 and 2011) says that stock market liquidity will not enhance incentives for acquiring information about firms or exerting corporate governance. Moreover, Devereux & Smith (2004), emphasize that greater risk sharing through internationally intergraded stock markets can actually reduce saving rates and show economic growth. Finally, Shleifer & Summers (2004) and Morck, Shleifer & Vishny’s (2000 a, b) analysis suggest that stock market development can hurt economic growth by easing counter-productive corporate takeovers. In terms of raising capital, Greenwood and Smith (1996) show that large, liquid and efficient stock market can ease savings mobilization. By agglomerating savings, stock markets enlarge the set of feasible investment projects since some worthy projects require large capital injections and some enjoy economics of scale, stock market that easy resource mobilization can boast economic efficiency and accelerate long-run growth. Disagreement exists however, over the importance of stock markets for raising capital. Mayer (2008), for example, argues that new equity issues account for a very small fraction of corporate investment.
2.2 Empirical Review
There is now a large body of empirical literature by previous writers to link the role of capital market development in the growth of private domestic investment in the economy. However, majority of the literatures (Levine & Zervous, 2011, Khan & Senhadj, 2009, Choong, Yusop & Sen 2005, etc.) focus on the role of capital market in economic growth. Other studies such as (Lynch 1995, Pelgim & Schich 2006, Bano, 2009 etc) have addressed impact of capital market on private investment growth. Levine & Zervous (2011), empirically evaluate the relationship between stock market development and longtime growth. The study suggests that stock market development is positively associated with economic growth. Moreover, instrumental variables procedures indicate a strong connection between the predetermined component of the stock market development and economic growth in the long-run. Reiffers (1995) has highlighted the role of factors such as the “accelerator” profit rate, interest rate, taxation and Tobin’s Q in explaining investment in France between 1972 and 1991. Reiffers analysis was based on co-integrating relationships and error correlation models. The results of the long-run analysis underscore the predominant role of financial variables (profit rate and interest rate). The accelerator variable also has an impact on the rate of capital accumulation, but this impact is unstable. The Chew stability test allowed the researcher to distinguish between three sub-periods (1972-1982, 1983-1987 and 1988-1991). For the first sub-period, it is the accelerator variable that comes first among the explanatory variables of the capital accumulation rate. In second position comes the real investment rate for the second sub-period, which witnessed a soaring of stock market rates, Tobin’s Q ratio is as much an explanatory factor of the capital accumulation rate as are the profit rate and the accelerator variable. As for the results for the third sub-period, which corresponds to the aftermath of the stock market in 1987, they show that Tobin’s Q no longer has a significant explanatory value, contrary to financial value and the accelerator variable. Reiffers (1995), concludes from this that there was from 1988, a change in investment behaviour, that is, firms no longer considered the increase in their stock market value as a criterion in their investment decision while this criterion had been taken into account in the preceding sub-period.
Levine & Zervous (1996), examine whether there, is a strong empirical association between stock market development and long-run on private domestic investment. The study used pooled cross-country time series regression of forty-one countries from 1976 to 1993 to evaluate this association. The study focused the line of (Demirgue-Kunte & Levine 1996) by conglomerating measures such as stock market size, liquidity and integration of the world markets into index of stock market development. The growth rate of Gross Domestic Product (GDP) per capita was regressed on the variety of variables designed to control for initial conditions. Political stability investment in human capital and macro-economic conditions, and, then includes the conglomerated index of stock market development. The finding was that a strong correlation between overall stock market development and result is consistent with the theories that imply a positive relationship between stock market development and private domestic investment. Pedro & Erwan (2004) asserted that financial market development raises output by increasing the capital used in production and by ensuring that capital is put into best uses. Ogwumike & Omole (1996), Ojo (1998), Abdullahi (2005), Adam & Sanni (2005) also asserted the importance of capital market in economic development in Nigeria.
Agarwal (2010) argued that financial sector development facilitates capital market development and in turn raises real growth of the economy. Thorton (2005), Rousseav & Sylva (2010), Calderon & Liu (2010), supported that financial system development promotes economic growth. In the same vein, Beckacrt et al (2005), demonstrated that capital market development increases economic growth. Bolbo et al (2005), indicated that capital market development has contributed to the economic growth of Egypt.
Tharawanji (2007), observed that countries with deeper capital market face less severe business cycle output contraction and lower chances of an economic down turn compared to those with less developed capital market. Samuel (1996) carried out a comparative study of several models that explain the evolution of firm’s investment expenditure. The estimates in this study were based on data from a panel of 331 American manufacturing firms over the 1972-1990 periods. The results showed that the main determinant of investment was cash flow. Firm managers also paid more attention to the availability of internal sources of funding and to the cost of capital than to the evolution of their firm’s stock market.
Zenfact (2007) studied the investment behaviour of manufacturing firms in Cameroon between 2002 and 2006. The findings revealed a negative influence of uncertainty on investment, a high adjustment speed and strong-capital profitability elasticity. Demand seems to also have played a decisive role in capital accumulation. Using a model inspired by Bertola (2008), and a panel of 200 manufacturing firms in Ghana over two years (2004-2005), Paltilo (2009), found that because of demand uncertainty each firm would wait for the marginal productivity of capital to rise beyond a specific threshold before it could invest. The level of this threshold rises as uncertainty increases. Sen (2000) studied a panel of 30 firms in Senegal over nine years (1988-1994) and found that private investment was mostly influenced by the accelerator phenomenon. Most often, Senegalese firm’s investment depended on demand fluctuations. These firms also had a high adjustment speed. In a study of investment behaviour of big firms in Benin. Ghansounou (2001) found that these firms were more influenced by the relative cost of capital and demand variations to which manufacturing firms were more sensitive in comparison with commercial firm. Adjasi & Biekpe (2005) studied the effect of stock market development on economic growth in 14 African countries in a dynamic panel data model setting. Results largely show a positive relationship between stock market development and economic growth. Further analysis based on the level of economic development and stock market capitalization is also conducted. The results reveal that the positive influence of stock market development on economic growth is significant for countries classified as upper middle-income economies. On the basis of market capitalization groupings, stock market developments play a significant role in growth only for moderately capitalized markets. The general trend in results shows that low-income African countries and less developed stock markets need to grow more and develop their markets to elicit economic gains from stock markets. Benhabib & Spiegel (2004), decomposing the well-documented relationship between financial development and growth, examine that financial development affects growth solely through its contribution to growth in primitives or factor accumulation rates or has a positive impact on total factor productivity growth. Their results suggest that indicators of financial development are correlated with both total factor productivity and investment. However, the indicators that are correlated with total factor productivity growth differ from those that encourage investment. In addition, many of the results are sensitive to the inclusion of country fixed effects which may indicate that the financial development indicators are proxying for broader countries characteristics. Osinubi (2012) empirically assessed the relationship between stock market development and long-run economic growth in Nigeria for the period of 1990-2010. The study used secondary data while four models of multiple regressions were specified. The regression results which were obtained using the ordinary least squares (OLS) shows that the measure of stock market development statistically has no significant effect on economic growth in Nigeria during the periods 1990-2010. The major implication of the findings is that if the Nigerian stock market is significantly contributing to rapid economic growth, policies must be fashioned out to eliminate these factors that blur the effectiveness of the variable or transmission mechanism through which stock market activities influence economic growth. Based on the findings, it was recommended that there should be an improvement in the attractiveness of the market as a major source of raising capital. This will entail improvement in the physical infrastructure, more efficient share transfer and delivering system and provision of adequate and timely information on the market. Also, they should be improvement in the institutional regulation, environment and legal framework such that a balance is maintained between the soundness and safety of the market. Finally, there is the need to internationalize the stock market to improve the flow of savings.
This will give the market the advantages of risk diversification, improve information flow and encourage corporate control through inIn Nigeria, some authors have attempted to examine the relationship between stock market development and economic growth. Adam & Sani (2005), examine the role of stock market on Nigerian economic growth using Granger causality test and regression analysis. The authors discovered on-way causality between GDP growth and market capitalization and a two-way causality between GDP growth and turnover rates. The authors advised that government should encourage the development of the capital market, since it has a positive effect on economic growth.
Obamiro (2010) investigated the roles of the Nigeria stock market in the light of economic growth. The author reported a significant positive effect of the stock market on economic growth. He suggested that government should create more enabling environment so as to increase the efficiency of stock market to attain higher economic growth. Ezeoha et al (2009) investigated the nature of the relationship that exists between stock market development and foreign private investment flows in Nigeria that is private domestic and foreign private domestic investment flows in Nigeria. The authors discovered that stock market development promotes private domestic investment flows thus suggesting the enhancement of the economy’s production capacity as well as promotion of the growth of national output. However, result shows that the stock market development has not been able to encourage the flow of foreign private domestic investment in Nigeria. Kolapo and Adaramola (2012) examined the impact of the Nigerian capital market on its economic growth from the period of 1990-2010.
Economic growth was proxied by Gross Domestic Product (GDP) while the capital market variables considered include; Market Capitalization (MCAP), Total New Issues (TNI), Value of Transactions (VLT), and Total Listed Equities and Government Stocks (LEGS). Applying Johansen co-integration and Granger causality tests, results showed that the Nigerian capital market and economic growth are co-integrated. This implies that a long run relationship exists between capital market and economic growth in Nigeria. The causality test results suggest bidirectional causation between the GDP and the value of transactions (VLT) and a unidirectional causality from Market capitalisation to the GDP and not vice versa. This is a clear indication of the relative positive impact the capital market plays on the economic growth of the country. The evidence from the study reveals that the activities in the capital market tend to impact positively on the economy and the study recommended that the regulatory authority should initiate policies that would encourage more companies to access the market and also be more proactive in their surveillance role in order to check sharp practices which undermine market integrity and erode investors’ confidence. Nyong (1997) developed an aggregate index of capital market development and used it to determine its relationship with long-run economic growth in Nigeria. The study employed a time series data from 1970 to 1994. Four measures of capital market development, the ratio of market capitalization to GDP (in percentage), the ratio of total value of transactions on the main stock exchange to GDP (in percentage) and listings were used. The four measures were combined into one overall composite index of capital market development using principal composite analysis. A measure of financial market depth (which is the ratio of broad money to stock of money to GDP) was also included as control variable. The result of the study was that capital market development is negatively correlated with long-run growth in Nigeria. Ted et al (2005), examine the empirical association between stock market development and stock market in India, Whereas the authors found support for the relevance of stock market development to economic development during pre-liberation, they discovered a negative relationship between stock market development and economic development for the post liberalization period. Ewah et al (2009) appraised the impact of capital market efficiency on economic growth in Nigeria using time series data on market capitalization, interest rate, total market transaction, and government stock between 1961-2004 using multiple regression and ordinary least square estimation techniques. The result of the study reveals that the capital market in Nigeria has the potential to induce growth, but it has not contributed meaningfully to the economic growth of Nigeria because of low market capitalization, low absorptive capacity, illiquidity, misappropriation of funds and many others.
Demetriades, et al (2001) utilized time series data from five developed countries, to examine the relationship between stock market and economic growth, controlling for other effect of the banking system and stock market volatility. Their result supports the view that, although banks and stock market may promote economic growth, the effect of bank is more. They suggested that the contribution of stock market to economic growth may have been exaggerated by studies that uses cross country regressions. Mohtadi & Agarwal (2004) examined the capital market and economic growth in developing countries using a panel data approach that covers 21 emerging markets over 21 years (1977 – 1997), they found that turnover ratio is an important and statistically insignificant determinant of investment by firms and that these investment in turn are significant determinant of aggregate growth. Foreign direct investment is also found to have a strong positive influence on aggregate growth. The result of the study indicates that both turnover ratio and market capitalization are important variables as determinants of economic Mishra, et al (2010) examined the impact of capital market efficiency on private domestic investment of India using the time series data on market capitalization, total market turnover and stock price index over the period spanning from the first quarter of 1991 to the first quarter of 2010.
Their study reveals that there is a linkage between capital market efficiency and private domestic investment in India. This linkage is established through high rate of market capitalization and total market turnover. The large size of capital market as measured by greater market capitalization is positively correlated with the ability to mobilize capital and diversify risk on an economy wide basis. The increasing trend of market capitalization in India would certainly bring capital market efficiency and thereby contribute to the growth of private domestic investment of the country. Osinubi & Amaghionyeodiwe (2003) examined the relationship between the Nigerian stock market and economic growth during the period 1980- 2000. Unfortunately, their results did not support the claim that stock market development promotes economic growth.
Adam & Sanni (2005) examined the role of stock market in Nigeria’s economic growth using Granger-Causality test and regression analysis. The study discovered a one-way causality between GDP growth and market capitalization and a two-way causality between GDP growth and market turnover. They also observed a positive and significant relationship between GDP growth turnover ratios. The study advised that government should encourage the development of the capital market since it has a positive relationship with economic growth.
Afees & Kazeem (2010) critically and empirically examined the causal linkage between stock market and economic growth in Nigeria between 1970 and 2004. The indicator of the stock market development used are market capitalization ratio, total value traded ratio and turnover ratio while the growth rate of gross domestic product is used as proxy for economic growth, using the Granger Causality (GC) test, the empirical evidence obtained from the estimation process suggests a bidirectional causality between turnover ratio and economic growth, a unidirectional relationship from market capitalization to economic growth and no causal linkage between total value traded. The result of the causality test is sensitive to the choice of variable used as proxy for stock (capital) market. Overall the result of the G.C test suggested that capital market drive economic growth.
Summary of Empirical Review
Empirical studies from other developing countries like Ghana and Thailand reveals that capital market activities affects growth solely through its contribution to growth in primitives and factor accumulation rates or has a positive impact on total factor productivity. In their analysis, reveals that indicators of capital market development are correlated with both total factor productivity and investment. However, the indicators of capital market activities that are correlated with factor productivity growth differ from those that encourage investment and are sensitive to the inclusion of country fixed effects which indicate that capital market development indicators are proxying for broader countries characteristics.
In Nigeria, some of the researchers have attempted to examine the relationship between capital market development and economic growth. Other studies focused on the impact of capital market on the growth of private investment in Nigeria and the impact of capital market on the private domestic investment on regions specific areas like in the South east areas of Nigeria. The study distinguishes the role played by capital market on the growth of private investment as a total component of total investment controlling for country specific objectives. This work is premised on examining the impact of capital market activities and developments on the private domestic investment in Nigeria. The study will fill the gap that has been derailing the success of domestic private investment in Nigeria and suggest to the government on how to tackle the capital market reform on improving the local investment that has been ignored overtime.
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