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THE IMPACT OF STOCK MARKET PERFORMANCE ON
THE GROWTH OF NIGERIAN ECONOMY
BY
ALADE FEMI JOHN
EC/2006/192
DEPARTMENT OF ECONOMICS
FACULTY OF SOCIAL AND MANAGEMENT SCIENCES
CARITAS UNIVERSITY
AMORJI-NIKE,
ENUGU
TITLE PAGE
THE IMPACT OF STOCK MARKET PERFORMANCE ON THE
GROWTH OF NIGERIAN ECONOMY
A PROJECT SUBMITTTED IN PARTIAL FULFILLMENT OF THE
AWARD OF BACHELOR OF SCIENCE (B.Sc) IN ECONOMICS
BY
ALADE FEMI JOHN
EC/2006/192
DEPARTMENT OF ECONOMICS
FACULTY OF SOCIAL AND MANAGEMENT SCIENCES
CARITAS UNIVERSITY
AMORJI-NIKE, ENUGU STATE
APPROVAL PAGE
This project has been approved as satisfying the requirement of Department
of Economics, Faculty of Management and Social Science, Caritas University
Enugu for the award of Bachelor of Science (B.SC) Degree in Economics.
……………………………
……………………
Mr. Ugwu Johnson
Barr. P.C Onwudinjo
Project Supervisor
Head of Department
Date ………………………
Date………………………..
……………………………….
………………………….
Dr. C.C Umeh
External Examiner
Dean of faculty
Date…………………………
Date…………………….
DEDICATION
I dedicate this work to Alpha and Omega, the beginning and the end. To the
one I love most on earth, my Mother Mrs. Ireti Ketiku and to my father Engr.
Duro Ketiku, and to my siblings for their love and care.
ACKNOWLEDGEMENT
I want to use this opportunity to say thank you to everyone who has made an
impact in my life, everyone who has made me see life in a different light, and
everyone one who has made me realize myself.
With humility and a sense of obligation, I express my profound gratitude to all
those who have directly or indirectly contributed to the success of this research
project. I duly regard God Almighty for the spirit of might and of counsel, and also
for his protection over me throughout my stay in Caritas.
I also acknowledge the great visionary and pursuer of this dream, Very Rev. Fr.
E.M.P Edeh, without him, Caritas University would not have been.
I wish to express gratitude to my supervisor, Mr. Ugwu Johnson, who was neither
weary nor tired throughout his supervision of this project. He also spared his
congested time to vet the script and for his very helpful comments and suggestions.
I also appreciate the effort of my present and past lecturers most especially Prof
Onah, Prof. Udabah S.I, Dr Asogwa F.O, Dr Umeadi, Mr. Ojike R.O, Mrs.
Okonkwo P.N, Mr. Agu S.V, Mr. Ogbonna I.C, Mrs. Uwajimogu N, and my
H.O.D Barr. Onwudinjo P.C.
My sincere gratitude goes to my loving mother Mrs. Ireti Ketiku, without her, I
wouldn’t have being, also to my Father Mr. Duro Ketiku, Daddy you are
wonderful. I also acknowledge my siblings, Toluwalope, Oluwasanmi,
Oluwadolapo, Babakolade, and Olugbenro.
Indeed, I am also indebted to my friends and roommates, most especially Paddy,
Alex, Enesi, Tolulope, Soji, Ebuka, Bossan, Stanley, Titi, Stephen, loveth, Chucks,
David, phenashus, John, and those I couldn’t mention, I love you all.
Alade Femi John
Caritas University, Amorji Nike, Enugu
ABSTRACT
This study is motivated primarily by the need to enhance capital
accumulation from the stock market, being the long term end of the financial
system. This study is an investigation of the impact of Nigeria stock
exchange performance on the economic growth of Nigeria. To accomplish
these objectives, an econometric methodology was adopted as a tool for
testing the stated hypothesis. The ordinary least square was chosen as the
estimation tool because of the advantages it has over other estimation
technique considering the phenomenon under study.
The result of the student - t test revealed that the coefficient for market
capitalization, investment rate and real exchange rate are all statistical
significant at 5 percent level of significance. But the coefficient of real
interest rate were not statistically significant at 5 percent level of significance
The R2 which is the coefficient of multiple determination also revealed that
99 percent of the variation in the dependent variable is caused by the
variation in the explanatory variables. The F test result suggested that the
model is statistically significant.
Expansion and efficiency of the Nigerian Stock Market would also be
realizable if the recommendations in this project are considered This study
recommends that the financial sector should be fully liberalized for efficient
functioning of the financial system, the activities of the Nigerian Stock
Exchange should be made more transparent as this will bring bout confidence
in the mind of investors and people will be encouraged to invest, and the
Government should encourage Nigerians to take advantage of the Stock
Market and save for investment growth and capital formation in Nigeria.
TABLE OF CONTENT
Title Page ……………………………………………………………….i
Approval Page
……………………………………………………….ii
Dedication ……………………………………………………………...iii
Acknowledgement
Abstract
…………………………………………………iv
…………………………………………….………………v-vi
Table of Content
………………………………………………..vii-viii
CHAPTER ONE
1.1 Background of the study ………………………………………1-10
1.2 Statement of the problem………………………………………10-11
1.3 Objectives of the study…………………………………………11
1.4 Hypothesis of the study………………………………………...11
1.5 Significance of the study……………………………………….12-13
1.6 Scope and limitation of the study………………………………13
CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical literature…………………………………………..14-48
2.2 Empirical literature…………………………………………….48-56
CHAPTER THREE
METHODOLOGY
3.1 Method of Evaluation…………………………………………..57-61
3.2 Model specification……………………………………………..61-63
3.3 Data required and source………………………………………..63
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULT
4.1 ADF Test for stationery………………………………………64-66
4.2 Co integration test……………………………………………..66-67
4.3 Presentation of regression result……………………………...67-68
4.4 Interpretation of regression results……………………………68-70
4.5 Statistical criteria……………………………………………….71-74
4.6 Economic criteria……………………………………………….74-78
4.7 Evaluation of hypothesis……………………………………….78
CHAPTER FIVE
SUMMARY, CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary…………………………………………………….79-80
5.2 Conclusion………………………………………………….80-82
5.3 Policy Recommendation………………………………..….82-83
Bibliography………………………………………………….84-90
Appendix……………………………………………………..91-97
CHAPTER ONE
1.1
BACKGROUND TO THE STUDY
Primarily, a stock market is the place where companies can raise money to
make their businesses bigger and better. Companies raise money by selling
shares or stocks to investors. At the same time, the stock market gives
investors an opportunity to invest in these companies and benefit from any
profit they can make.
A stock market can also be called a capital or securities market as it
encompasses the stock exchange, the branches, and the stockbrokers. An
organized securities market requires a securities exchange, a securities
commission or other regulatory agency, and intermediaries such as dealers,
brokers, securities analysts, etc. Virtually all costs are borne by those who
benefit. The intermediaries receive their fees from the issuers or investors to
whom they provide a service. The stock market is usually funded through
fees paid by investors and issuers; even the expenses of the securities
commission may be partially paid for by registration fees rather than being a
major burden on the government budget. Companies which go public are
subject to continuous cost of providing financial information, transferring
shares, paying dividends, and other aspects of shareholder relations. The
stock market is the aspect of the financial system which mobilizes and
channels long term funds for economic growth. The stock market embraces
trading in both new issues (primary) and old issues of stocks (secondary).
Securities are primarily of 2 types: debt and equity. Debt securities include
federal government development stock (GDS), industrial loans, preference
stocks, bonds e.t.c, while equity securities mainly concern ordinary stocks
which impose higher liabilities on the holders. Portfolio investment in the
capital market is the acquisition of financial assets (which includes stock,
bonds, deposits, and currencies) from one country in another country. It is a
form of investment that attempts to achieve a mixture of income and capital
growth, it deals with an institutional arrangement involving the Securities and
Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the
operators, and the investors. Stock market is viewed as a medium to
encourage saving, help channel savings into productive investment, and
improve the efficiency and productivity of investment. The emphasis on the
growth of stock markets for domestic resource mobilization has also been
strengthened by the need to attract foreign capital in non- debt creating forms.
A viable equity market can serve to make the financial system more
competitive and efficient. Without equity markets, companies have to rely on
internal finance through retained earnings. Large and well established
enterprises are in a privileged position because they can make investment
from retained earnings and bank borrowings, while new companies do not
have easy access to finance. Without being subjected to the scrutiny of the
stock market, big firms get bigger, and for the emerging smaller companies,
retained earnings and fresh cash injections from the controlling shareholders
may not be able to keep pace with the needs for more equity financing which
only an organized market place could provide. The corporate sector would
also be strengthened by the requirements of equity markets for the
development of widely acceptable accounting standards, disclosure of
regular, adequate, and reliable information. While closely held companies
can camouflage poor investment decisions and low profitability, at least for a
while, publicly held companies cannot afford this luxury. The availability of
reliable information would help investors make comparism of the
performance and long term prospects of companies; corporations to make
better investment and strategic decisions; and provide better statistics for
economic policy makers.
The capital market in any country is one of the major pillars of long term
economic growth and development. The market serves a broad range of
clientele including different levels of government, corporate bodies, and
individuals within and outside the country. For quite some time now, the
capital market has become one of the means through which foreign funds are
being injected into most economies, and so the tendency towards a global
economy is more feasible/ visible there than anywhere else. It is, therefore,
quite valid to state that the growth of the capital market has become one of
the barometers for measuring overall economic growth of a nation.
Historically, the financial sector in the developing world has been primarily
bank based. But, in recent years, there has been a gradual shift to a more
holistic approach which, alongside the banks, seeks to develop the securities
market. Some of the strength of the securities market which makes them the
focal point of the shifting emphasis is their ability to:
1. mobilize long term savings for financing long tenure investments;
2. provide risk capital (equity) to entrepreneurs;
3. encourage broader ownership of firms; and
4. Improve the efficiency of resource allocation through competitive
pricing mechanisms.
5. Provision of alternative sources of finance other than taxation and
foreign loan to fund public projects.
Apart from these primary benefits, a developed securities market in the sense
of efficient financial intermediation further brings additional gains to the
economy. These gains arise through:
1. lower cost of equity capital for firms;
2. imposition of discipline on corporate managers as share prices react to
right and wrong judgment in firm’s investment decisions;
3. existence of mechanisms for appropriate pricing and hedging against
risk; and
4. Increased flow of funds to the domestic economy as international
capital responds to the thriving stock market.
The development of securities market could help to strengthen corporate
capital structure (i.e. the composition of the capital of the firms) and efficient
and competitive financial system. The stock market encourages savings by
providing households with an additional instrument which may better meet
their risk preferences and liquidity needs.
In well-developed capital markets, share holding provides individuals with a
relatively liquid means of sharing risks in investment projects. To the extent
that securities and bonds are a viable and relatively secure form of investment
with an attractive long term return, they serve two functions:
1. stocks provide an incentive to save and invest; and
2. Financial savings are promoted and domestic savings rate increase as a
whole.
Stock market development has an important role to play in economic
development. Shahbaz and his friends (2008) argue that stock market
development is an important wheel for economic growth as there is a longrun relationship between stock market development and economic growth.
Stock market development has the direct impact in corporate finance and
economic development. Gerald (2006) states that stock market development
is important because financial intermediation supports the investment process
by mobilizing household and foreign savings for investment by firms. It
ensures that these funds are allocated to the most productive use and
spreading risk and providing liquidity so that firms can operate the new
capacity efficiently. A growing body of literature has affirmed the importance
of financial system to economic growth. Financial markets, especially stock
markets, have grown considerably in developed and developing countries
over the last two decades. Claessens, et al (2004) states that several factors
have aided in their growth, importantly improved macroeconomic
fundamentals, such as more monetary stability and higher economic growth.
General economic and specific capital markets reforms, including
privatization of state-owned enterprises, financial liberalization, and an
improved institutional framework for investors, have further encouraged
capital markets development. Similarly Mishkin (2001) states that a welldeveloped financial system promotes investment by identifying and financing
lucrative business opportunities, mobilizing savings, allocating resources
efficiently, helping diversify risks and facilitating the exchange of goods and
services. From the view point of Sharpe, et al (1999), stock market is a
mechanism through which the transaction of financial assets with life span of
greater than one year takes place. Financial assets may take different forms
ranging from the long-term government bonds to ordinary shares of various
companies. Stock market is a very important constituent of capital market
where the shares of various firms are traded Trading of the shares may take
place in two different forms of stock market. When the issuing firm sells its
shares to the investors, the transaction is said to have taken place in the
primary market but when already issued shares of firms are traded among
investors the transaction is said to have taken place in the secondary market.
Stock markets are very important because they play a significant role in the
economy by channeling investment where it is needed and can be put to best
(Liberman and Fergusson, 1998). The stock market is working as the channel
through which the public savings are channelized to industrial and business
enterprises. Mobilization of such resources for investment is certainly a
necessary condition for economic take off, but quality of their allocation to
various investment projects is an important factor for growth. This is
precisely what an efficient stock market does to the economy (Berthelemy
and Vardoulakis, 1996). Earlier research emphasized on the role of the
banking sector in the economic growth of nation. In the past decade, the
world stock markets surged, and emerging markets accounted for a large
amount of this boom (Demirguc-Kunt and Levine (1996a). Recent research
has begun to focus on the linkages between the stock markets and economic
development. New theoretical work shows how stock market development
might boost long-run economic growth and new empirical evidence supports
this view. Demirguc-Kunt and Levine (1996a), Singh (1997), and Levine and
Zervos (1998) find that stock market development is playing an important
role in predicting future economic growth. In underdeveloped countries like
Nigeria, the development and growth of stock markets have been widespread
in recent times. Despite the size and illiquid nature of stock market, its
continued existence and development could have important implications for
economic activity. For instance, Pardy (1992) has noted that even in less
developed countries capital markets are able to mobilize domestic savings
and able to allocate funds more efficiently. Thus stock markets can play a
role in inducing economic growth in less developed country like Nigeria by
channeling investment where it needed from public. Mobilization of such
resources to various sectors certainly helps in economic development and
growth. Stock market development has assumed a developmental role in
global economics and finance because of their impact they have exerted in
corporate finance and economic activity. The role of financial system is
considered to be the key to economic growth (Neupane, et. al. 2006). Paudel
(2005) states that stock markets, due to their liquidity, enable firms to acquire
much needed capital quickly, hence facilitating capital allocation, investment
and growth. Stock market activity is thus rapidly playing an important role in
helping to determine the level of economic activities in most economies
Tuladhar (1996) states that financial markets are catalyst in the development
of economy. The study further added that developed economies have highly
sophisticated financial institutions. Over the past decade, many developing
economies have established capital markets as they moved towards more
liberal economic policies. These emerging markets have shown extraordinary
growth with very high volatility, which have attracted many investors into
these markets.
1.2
STATEMENT OF THE PROBLEM
Mobilization of resources for national development has long been the central
focus of development. To this end, various papers, research works, seminars,
e.t.c. have been written and held to find the best way to mobilize resources
for economic growth. It is now increasingly being recognized that the growth
process of the Nigerian economy depends to a considerable extent on the
effects of stock market. Whether this effect is positive or negative is a
research problem to be solved. In the light of the research problems, the key
question this study attempts to answer is:
1. Does the Stock Market Performance have an effect on the GDP?
2. What is the impact of change in investment links on the growth of
Nigeria stock market?
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the role which the stock
market plays in the growth process of the Nigerian economy.
However, the specific objectives include:
1. To determine if the market capitalization can lead an economy to
growth
2. To determine the impact of change in investment links on the growth of
Nigeria’s stock Market.
1.4
HYPOTHESIS OF THE STUDY
The hypothesis tested in this study is:
H0: there is no significant impact of Stock Market performance on
economic growth.
HO: changes in investment links have no significant impact on the
growth of Nigeria’s stock Market
1.5
SIGNIFICANCE OF THE STUDY
Due to the fact that there are no viable equity markets, the capital structure of
firms are generally characterized by heavy reliance on international finance
and bank borrowings which tend to raise debt/ equity ratios.
Thus, the development of an active market for stocks could provide an
alternative to the banking system for both savers and users of funds.
There are a lot of studies about the connection between stock prices
fluctuations and economic growth as well as other economic variables which
have detected that changes in stock prices reflect real economic situation.
Economic growth through the changes in levels of real economic activities
affects profitability and activity of firms. As a result, with changes in
profitability prospects, expected earnings and dividends of shares, stock
prices fluctuate (Fama, 1990; Ferson and Harvey, 1993; Cheung and Ng,
1998; Mauro, 2003; Ritter, 2004; Liu and Sinclair, 2008; Shahbaz et al.,
2008).
On the other hand, other studies have examined the impact of stock prices on
macroeconomics indicators. According to the results of these investigations
share prices fluctuations play a role in directing economic activities in the
medium and long term. Stock prices reflect the expectation of public towards
the future economic activity. In other words, the stock market is forwardlooking and stock prices reflect anticipations about future economic activity.
If a recession is expected, for example, then stock prices reflect this by
decreasing in value whereas large increase in stock prices may reflect the
expectation towards future economic growth (Jefferis and Okeahalam, 2000;
Nasseh and Strauss, 2000; Mauro, 2000; Shirai, 2004; Adajaski and Biekpe,
2005; Mun et al., 2008). This work represents an attempt to close the gap
between these different literatures, by examining the impact of stock market
performance on the growth of Nigeria economy.
1.6
SCOPE AND LIMITATIONS OF THE STUDY
This study appraises the performance of the stock exchange in consonance
with its impact on the success or failure of the Nigerian economy.
The scope of the study is based on the Nigerian stock exchange from the key
sectors of the economy.
The study examines the performance level over a 28 year period (19802007). The reason being that, a study period this long will, probably, reduce
any form of bias in the results of estimate
CHAPTER TWO
`
LITERATURE REVIEW
2.1.0 THEORETICAL LITERATURE
The capital market, as a strong avenue for wealth creation, plays a key role in
economic growth and development. The distribution of the wealth is also
more equalitarian because the system does not discriminate between investors
and the rate of return. What each investor gets out of the system is a matter of
what he invests.
The capital market is the segment of the financial market where medium to
long term financial instrument are created and/or traded to meet the long term
funding needs of economic activities. The degree of effectiveness and
efficiency of the market will determine the extent to which it will contribute
to the process of economic growth and development. Adedipe (2004)
The capital market can also be defined as the aggregation of institutions and
mechanisms through which long term funds are mobilized and used for
development purposes (Obadan 1998)
The capital market, given the long term horizon and liquidity offered by its
secondary market, provides the best framework for the mobilization of
resources – G. Onosode (1998)
According to K.S. Adeyemi (1998), the capital market is the aspect of the
financial system which mobilizes and channels long term funds for economic
development.
“The capital market provides another option for government and companies
to raise long term funds for the execution of capital projects such as
construction of bridges, schools, factories, and purchase of vehicles,
facilities, and equipment. This compares with the money market, which
represents the short- end of the financial system that provides facilities for
claims and obligations whose maturity vary from one day to one year.”
(Okereke- Onyuike 2000).
Ndanusa, S.A (2004), defined capital market as the collection of financial
institutions set up for the mobilization of medium or long term loans. It is a
market for long term instrument which include; market of mortgages of loan
that is the market for mobilization and utilization of long- term loans. It is a
market for long term funds for development.
Osondu(1993) within the capital market are the primary and secondary
market which includes issuing houses and the securities authorities for
issuing of corporate bonds, shares and market of mortgage, this concern and
its activities regulations rest in the hand of the stock exchange.
Hence, capital market could be referred to as the mechanism whereby
economic units desire to invest their surplus funds, interact directly through
financial intermediaries with those who wish to procure funds for their
business through the issuance or sale of shares stocks, bonds e.t.c Uzoagu
(2002)
.
In the Nigeria context, participants includes; the Nigerian stock exchange,
discount houses, development banks, investment banks, stock broking firms,
quoted companies, the government, individuals and the Nigeria Securities
and Exchange Commission. However, the Nigerian stock Exchange operates
and manages the activities of the capital market.
The capital market embraces trading in both new issues (primary) and old
issues of stocks (secondary).
EFFECTIVE
DEVELOPMENT OF THE CAPITAL MARKET IS NECESSARY FOR THE
FOLLOWING REASONS.
a. The mobilization of savings from surplus economic units for
channeling into national economic growth;
b. The broadening of the ownership base of assets and, this, the creation
of a healthy private sector through the empowerment of asset
ownership.
c. The promotion of rapid capital formation and real investment culture as
against short term portfolio investments.
The economic theory ‘growth’ is essentially a long term concept. It
ignores short-term fluctuation in actual national income and emphasizes the
impact of investment on raising expected income. Investment in the long run
creates more and better capital equipment. The addition to the economy’s
stock of capital raises the potentials of national income. The long-term
increases in the growth theory rather than the short term fluctuations are
found in Keynesian theory of income determination.
Keynes (1978) said, from the earliest time- there was a very great change
in the standard of life of the average person. This slow rate of progress or
lack of progress was due to two reasons, the remarkable absence of important
technical improvement and the failure of capital accumulation.
Baran (1978) observed that the principle obstacles to rapid economic growth
in the backward countries are the way in which their potential economic
surplus is utilized.
From the above elucidation, it could be seen that the capital market is
paramount for economic growth in any economy.
2.1.1 BRIEF HISTORY OF NIGERIAN STOCK MARKET
The Nigerian capital market (NCM) first came into existence in 1960 though
it was then the Lagos Stock Exchange. It began operations in 1961 with 19
securities listed for trading. It had an authorized share capital of 10,000 Naira
of 500 shares at 20 Naira each. The exchange was incorporated under the
company ordinance as an associated company limited by guarantee and
formed to promote commerce in Nigeria. The Lagos Stock Exchange was
given initial financial backing by the Central Bank of Nigeria (CBN).
In December 1997, following the recommendation of the government
financial system review committee of 1976 headed by Pius Okigbo, the
Lagos Stock Exchange was renounced and reconstructed into the Nigerian
Stock Exchange.
The Nigerian Stock Exchange has trading floors (some of them are
electronic) in different parts of the country, though the headquarters is in
Lagos. The trading floors were established at different times and they
include;
- Lagos
1961
-Kaduna
1978
-Port-Harcourt
1980
-Kano
1989
-Onitsha
1990 (February)
-Ibadan
1990 (August)
-Abuja
1999
-Yola
-Uyo
2002.
2007.
The Nigerian Stock Exchange is the centre point of the Nigerian Capital
Market, while the Securities and Exchange Commission is the apex
regulatory body.
The Nigerian stock market has been operating for a little more than three
decades. At inception, a specific exchange floor was established for it on the
5th of June, 1961. Dealings on the stock exchange are made through the
brokers and jobbers, who themselves must be approved members of the
exchange.
As at December 31, 1991, more than 1/3 of the traded companies had been
fully privatized while most of the others, relatively younger, have
government as an important shareholder. The Nigerian Stock Exchange
provides a strong mechanism for mobilizing private and public savings and
makes such funds available for productive purposes.
The exchange also provides a means for trading securities and encourages
larger scale enterprises to gain access to public listing. The Nigerian stock
market operates the main exchange for relatively large enterprises the 2 nd tier
securities market (SSM) when listing requirements are less stringent for small
and medium scale enterprises.
According to the review of market performance in 2007 by the Director
General of Nigeria Stock Exchange, Professor Ndi Okereke-Onyuike, there
were 309 securities listed on the exchange with a total market capitalization
of 13.295 trillion naira. Many of these listed companies actually have
multinational affiliations.
2.1.2 PROCESS IN THE STOCK EXCHANGE MARKET
There are lots of processes involved in the stock exchange market, they are
discussed below;
Firstly, we have what is called prospectus, which is any notice, circular
advertisement or any document that offers to the public for subscription or
purchase of any shares or debenture of a company.
It is also a legal document issued when raising finance for a public company
through a share issue, the content of which are subject to strict regulation.
There is also Equity, which is the residual right of ownership over the asset of
a company. It is a right that can be enforced only when everyone else has
been paid. Specifically, the ordinary shares of a company. Central Security
Clearing System (CSCS) is a computerized system of trading stock at the
stock exchange. It makes the market most efficient, very transparent, fair, and
simple. Insider Dealing is an Illegal dealings in shares by person with
knowledge obtained from his position in the company. We have the Bears;
they are value or long term investors. The Bulls are speculative or short term
profit takers. The Issuing houses are mainly stock broking firms. It describes
the corporate finance activity of merchant banks and stockbrokers. Members
of the exchange need expertise to act as issuing houses, while companies
need to be dealing members of the Nigerian stock exchange to become
stockbrokers. The Market Capitalization is a firm’s value, as determined by
the market price of its issued and outstanding common stock. The automated
Trading system is a system whereby the the Nigerian Stock Exchange
operates with dealers’ trading through a network of computers connected to a
server. The automated trading system (ATS) has facilities for remote trading
and surveillance. The exchange is in the process of connecting with dealers to
commence trading from their offices or any part of the world. The Primary
Market is a market where entirely new shares are offered for the first time.
The modes of offer include right issues, offer for subscription, offer for sale,
private placements. The Secondary Market is a market where existing
securities are traded after their issuance in primary markets. In this case, over
the counter market and organization market are available to rapid liquidity to
investors. Securities traded here include: preference shares, debenture stocks,
federal government development stocks, state and local government bonds
and equities. Only licensed stock brokers of the stock exchange are allowed
to transact business i.e. buy and sell shares on behalf of their customers. We
also have what is referred to as the Derivative market; this is the type of
market that is still at infant stage. It does not trade in issued securities but on
the basis of future title to the security. Right offer is, probably, the only
derivative being actively traded on the floor of the exchange. However,
global depository receipts have been issued.
The constituencies of the Nigerian Stock Market can be classified broadly
into four categories:
i.
Regulators: They include:
- Securities and Exchange Commission (SEC)
- The Nigerian Stock Exchange (NSE)
- Federal Ministry of Finance
- Central Bank of Nigeria (CBN)
ii.
Intermediaries: They include:
- Registrars
- Stock broking firms
- Issuing Houses
- Audit Firms
iii.
Fund Providers: They include:
- Individuals
- Unit trusts
- Pension funds
- Insurance companies
iii.
Fund users: They include:
- Companies
Government
2.1.3
HOW TO GET LISTED ON THE STOCK MARKET
An issuing house or stockbroker is required to get listed on the Nigerian
Stock market, either for the purpose of raising long term funds or otherwise.
It is the duty of the issuing house or stockbroker to study the company’s
performance over the years, in order to determine its financial needs and to
provide it with financial advisory services.
The issuing house or stockbroker, together with reporting accountants,
trustees, solicitors, and auditors produce a marketing document known as the
Prospectus. This is the document the public rely on for making investment
decisions.
Necessary approval is sought from the Securities and Exchange Commission
and other bodies. The proceeds of the issue are handed over for executing the
proposed business program on long term investment and the stock is listed on
the daily official list of the exchange.
Listed below are the benefits of being quoted on the stock exchange:
- Easy access to funds
- Boosts public confidence
- More transparent share valuation
- Mergers and acquisition is made easier
- More transparent share valuation
- Enhanced status and credit facilities
- Continuity of operations
The 2 main markets listed on the Nigerian Stock Exchange presently are:
i. The Main Market or First Securities Market: this is only for companies that
have a primary listing on a foreign recognized stock exchange. These
companies must have complied fully with all foreign listing requirements.
ii. The Second Tier Securities Market: it was established in 1985 to
encourage local entrepreneurs. It is a market for small and medium scale
industries that cannot comply fully with listing requirements expected of
them.
2.1.4 REVIEW OF DEVELOPMENT IN THE NIGERIAN STOCK MARKET
The Nigerian capital market has grown tremendously since the establishment
of the NSE (formerly the LSE) in 1961. Market capitalization as at the end of
1995 was N2.0b, up from N1.4b in 1990. Another index of size is the number
of quoted securities which, for Nigeria, rose from 9, comprising 3 equities
and 6 government securities in 1961, to 153 in 1980 with 90 equities, 13
debentures and 50 government securities. By 1994, it had further risen to 276
including 29 government stock, 70 industrial bonds and 177 equities.
The growth of the Nigerian market has been influenced by government
patronage, legislations, and policies. In the 1960s and 1970s, government
raised funds from the market usually by floating development stocks. Also,
government enacted legislations such as the income tax management Act
1961 which required both the pension and provident funds to invest a
substantial
proportion
of
their
funds
in
government
stock.
The
implementation of the Nigerian Enterprises Promotion Decree significantly
stimulated the growth of the Nigerian capital market by making equity
available.
In 1984, the Stock Exchange took the initiative of introducing the second tier
securities market (SSM) which gave encouragement to small / medium scale
industries to seek quotation by stipulating less stringent listing requirements
for them. This widened the investor base as well as the supply of securities on
the market.
In 1997, the Nigerian Stock Exchange introduced the Central Settlement and
Clearing System that was expected to reduce the clearing days to 5 after
transactions. Prior to this, the delivery system was very cumbersome as it
took weeks for an investor to receive evidence of title for securities
purchased. The delay was caused by the system of registration, authentication
and the slow postal system.
On the 1st of March 2000, the clearing days were further reduced to T+ 3, and
by June of the same year, the Central Settlement and Clearing System
(CSCS) launched a phone- in system to enable investors to confirm their
stocks at any time, from any location.
Another thing that affected the integration of the capital market with the
global financial system was the issue of transfer of dividends and capital by
the foreign investors. This was handled by the Foreign Exchange (monitory
and Miscellaneous Provision) Decree No. 17 of 1995 which guaranteed
transfer of funds unconditionally through an authorized dealer in freely
convertible currencies.
In keeping with the trend in the global securities market, The Nigerian Stock
Exchange commenced the process of Demutualisation in 2007(i.e. when a
mutual company owned by its users/members is been converted into a
company owned by shareholders. In effect, the users/members exchange their
rights of use for shares in the demutualized company) with the setting up of a
committee of Council to design a blueprint for its implementation. The
imperatives for Demutualisation lay in the enhanced financing opportunities
it opens to The Exchange and its promise of improved efficiency in the
management of The Exchange as a business.
The Trading Floor in Lagos was re-opened during this year, following a
comprehensive overhaul of the floor that included the installation of state-ofheart workstations, a central UPS (uninterrupted power supply) and stabilizer,
and a redesigning of the floor to accommodate more dealing members.
President Umaru Musa Yar’Adua GCFR, commissioned the new world-class
Trading Floor on Friday, November 9, 2007. The Exchange has in the wake
of this development commenced an upgrade of the Horizon, trading software.
The upgrade to the latest version of Horizon, which comes with improved
functionalities that would impact positively on trading on The Exchange,
especially with regard to derivatives and bond trading. There was also the
commissionioning of the Uyo Branch of The Exchange on Saturday, May 26,
2007 and the Automated Trading Floor was inaugurated on Monday,
November 19, 2007.This was aimed at giving more Nigerians access to the
market and expands the business opportunity for stockbroker. The Exchange
increased trading hours from two hours to three hours, in response to
increased trading activity. This has impacted positively on trading volume
and enhanced the pricing efficiency of the market. Work also continued in the
effort to deepen the Nigerian capital market by creating new products. Some
of the new products considered by The Exchange include: Mortgage-Backed
Securities,
Asset-Backed
Securities,
Exchange-Traded
Funds,
and
Derivatives such as Futures and Options. Significant headway was made on
the arrangement for the introduction of Real Estate Investment Trusts
(REITs), with the incorporation of the rules for this new market segment in
the Listing Requirements of The Exchange. In the same vein, the Exchange
incorporated into its Listing Requirements rules for the operation of a ThirdTier Securities Market for small and medium indigenous companies. During
this year, listed securities increased to 309, and market capitalization stood at
#13.295 trillion.
The liberalization of interest rate in the money market positively affected
development in the stock market as the era of subsidized interest rate to
commercial and industrial firms has come to an end. The market has also
demonstrated its ability to provide financing – equity and debt – to private
sector enterprises and debt financing for public sector projects of various
types and to the three tiers of government. Till date, the Nigerian stock
market has contented itself with addressing local and direct foreign investors
in private sector enterprises.
That the market has grown in size and diversity of instruments offered is
beyond dispute. Its continuing growth is essential to development in an
economy.
2.1.5 OPERATIONS OF THE NIGERIAN STOCK MARKET
Stock market operation cannot be fully understood unless one understands
the duality concept of the stock market: the price determinants and the
workings of the price movers. Here, it is necessary to explain some important
terminologies often used: the bulls and the bears.
The Bulls: they are speculative investors of short-term profit takers
The Bears: They are value or long term investors.
SHORT TERM TRADE IN THE STOCK MARKET
This is a speculative trade of buying stocks in anticipation of making gains
within a short period of time. The speculators come into the market to take
advantage of making quick money from the market and create conditions that
bring about a bullish market thus attracting new investors.
THE GAINS
The gains of short term play in stock market operation are many. One of the
most important is that they create conditions that bring about the “Bull
market”, which actually brings new investors into being, thereby making the
market more active, liquid and attractive. The prices of stock can go as high
as it could, and this will result to a continuous rise in both share index and
market capitalization.
It also makes the vibrancy of the market the talk of the town. Reports of
activities at the capital market have become frontline news in media houses,
including radio and television channels. All these were possible by the inflow
of short term players in the stock market. Smart investors are known to cart
away their profit and take to their heels before the sun set.
One wonders why people are willing to take the risk. It is because the odds
are stocked in their favor. In reality, the worst possible outcome could be a
100 percent loss of the investment, but the gains are potentially enormous and
tempting too
THE SHORTFALLS
The major pain of market timing is that it is full of many short lived peaks
and valleys. Therefore, one needs to know when the price is low and when it
will peak so as to take advantage of investing at a low price and sell when it
peaks before the downward trend sets in again. But this is very difficult
because there is the problem of always hoping to make money when the stock
was bought, making it difficult because there is the problem of always hoping
to make money when the stock was bought, making it difficult to
accommodate some losses by deciding to sell at a particular time. Thus, the
stock is held on the hope that the price will bounce back, which may not.
Short-term play teaches hard lessons to beginners, some of who may not
come back to the stock market. It brings bearishness to the market. Both the
market capitalization and all share indexes could come lower than has ever
risen.
REMEDIES
In our own opinion; the following measures should be considered as to avoid
the shortfalls:
1
The market trend should be studied and in particular, fundamentals of
the company such as turnover growth, profit before tax, earnings per
share, dividend per share and other qualitative factors.
2
There is also the need to take your loss quickly by accepting and
respecting market opinion.
3
Partial selling is also advisable. At least, a quantity of the stock to
enable recovery from the initial cost of investment while leaving the
profit with the market to play with.
2.1.6
i.
STOCK MARKET LEGISLATIONS
The Lagos Stock Exchange Act (1961): This is the legal backing
that established the Nigerian Stock Exchange. The salient point of
this act is that only licensed stock brokers and issuing houses are
allowed to buy shares on behalf of Nigeria and foreign investors.
ii.
The Securities and Exchange Decree 1979 and 1988 (as amended):
it established the Securities and Exchange Commission, the apex
regulatory body of the stock market. It is a government agency that
conducts surveillance in securities dealing, promotes market
development, and protects investors. The decrees replaced the
capital issues decree of 1973.
iii.
Privatization and Commercialization Decree No 25: this federal
government decree is the key element of the Structural Adjustment
Program, designed to re-orientate government enterprises for
privatization and commercialization towards a new horizon of
performance, improvement, viability, and overall efficiency.
iv.
The Indigenization Decree of 1972 and 1977: this decree sought to
enlarge the shareholding capacity of Nigerian citizens in Nigerian
companies. The decree has been amended as part of the new
industrial policy for Nigeria. Its main objective is to usher in a new
economic order for the country. The indigenization of the economy
had a positive impact on the stock market. The number of listed
companies on the exchange increased during the exercise and 78
companies complied with the provisions of the indigenization decree
through the stock exchange by reorganizing their ownership
structure.
v.
Foreign Exchange Miscellaneous Provision Decree 1995
vi.
Nigerian Investment Promotion Commission Decree 1996
2.1.7
STOCK MARKET PERFORMANCE
Stock Market Performance is the indicator of the stock market as a whole
or of a specific stock. It gives signal to the investors about their future
moves. The movement in the price of a stock and the indexes gives the
idea of the near future trend of the stock, sector or the economy as a
whole. As financial domain is the most important one of an economy, so
the stock market performance works as an indicator of the overall health
of the economy. Stock Market Indexes typically gives the overall
performance of the market or of a specific sector. Indexes reflect the
performance of the economy or a sector in entirety. Stock prices are an
indicator of the performance of the stock. If the price of a particular stock
is rising, then it is perceived that it has certain positive news or signals.
But if it decreases then there must be some news regarding its
performance, which is generating negative signals to the market. Hence,
the stock price movement and index movements show the general
economic trend of a country. Stock market performance is affected by a
wide array of factors such as economic, political, international, and
company- specific issues. When it comes to the overall index performance
then the domestic economy’s National income, GNP (GROSS
NATIONAL PRODUCT) growth, Monetary issues, Political stability,
International relations, Balance of Payment situation, e.t.c. comes into
consideration, but when it comes down to specific stocks, then the
company specific information (profitability, sales, profit margin, growth,
e.t.c.) play important role in the price determination of the stock. When the
stock prices and index movements show positive trend (that is upward
movement) then we call that the stock market performance are bullish. We
call an investor to be bullish when his perceptions about the market and
the economy are positive, i.e. he is expecting further rise in prices, and
consequently is in the buying spree. Some of the factors which boost up
the market are good present or projected economic growth of the
economy, positive monetary outlook of the apex bank, decrease in fiscal
deficit, good performance of a company in terms of profit, sales, e.t.c. But
when the general perception of the investors is negative, then the stock
market also declines showing a bearish trend. When a person is not
confident enough to buy stocks because of his negative expectations from
the economy and sell off stocks, then he is known as an investor with
bearish perceptions. If the performance of an economy is good, then the
stock market performance is also good and bull markets are inevitable.
Performance of a stock might exceed that of the actual performance of the
economy (or a company) because the expectations of the investors might
cross the actual performance of the same. Thus Bull Run encounters
correction of indexes or stocks from time-to-time, which is actually a
healthy sign. If the economic performances are not up to mark, then the
stock market is most likely to underperform and might see a downward
trend. This downward movement of the market is known as Bearish
Market. Bearish/Bullish market may sustain for weeks or months with
temporary rally known as secondary trend (or short term). When
Bullish/Bearish market runs continue from 5 to 20 years with occasional
corrections, then it is known as secular trend (Long term). Hence, overall
economic and stock specific performance influences performance of the
market. Thus, stock market performance acts as the barometer of the
Economy as a whole.
Economic Effects of Stock Market Performance
1. Wealth Effect
The first impact is that people with stock will see a loss of their wealth.
If a market fall is significant, it can affect their financial outlook. If
stockholders are losing money in the markets, they are generally more
hesitant to spend money; this can contribute to a fall in consumer
spending. However, the effect should not be given too much
importance. Often people who buy shares are prepared to lose money;
their spending patterns are usually independent of share prices,
especially for short-term losses.
2. Effect on Retirements
Anybody with a private pension or investment trust will be affected by
the stock market, at least indirectly. Retirement funds invest a
significant part of their funds on the stock market. Therefore, if there is
a serious fall in share prices, it reduces the value of retirement funds.
This means that future retirement payouts will be lower. If share prices
fall too much, retirement funds can struggle to meet their promises. The
important thing is the long-term movements in the share prices. If share
prices fall for a long time then it will affect retirement funds and future
payouts.
3. Consumer Confidence
Often stock price movements are reflections of what is happening in the
economy. E.g. recent falls are based on fears of a US recession and
global slowdown. However, the stock market itself can affect consumer
confidence. Bad headlines of falling share prices discourage people
from spending. On its own, bad news may have little consumer effect,
but combined with falling house prices and stock prices, consumer
confidence can be a strongly discouraging factor. Generally, the
consumer confidence impacts of falling markets are what affect
consumers and small businesses the most. This is known as a
“psychological” response of the consumer. This response has a far
greater chance of affecting you, the average consumer, business and
markets than stock market performance itself. If a customer is afraid of
spending, they will not. If fuel costs more, a greater amount of the
consumer’s discretionary capital is affected and they will not spend on
other items. In more challenging markets, consumers are far more
reluctant to utilize credit. This is smart for consumers, but does little to
extend their purchasing abilities to companies that have come to
depend on consumer spending. Nigeria for instance is a part of a
consumer-based economy. Most corporations rely on consumer
spending at one point or another. If the consumer does not spend, big
companies are impacted. To combat consumer unwillingness to spend,
credit allowed consumers to leverage their incomes. For the first time,
consumers are hyper-extended and unwilling to spend. In today’s
scenario, the unwillingness of the consumer to spend or to use credit
has affected companies dramatically. This is why consumer confidence,
or sentiment, plays a significant role in how we perceive our economy.
4. Investment
Falling share prices can hamper a firm’s ability to raise finance on the stock
market. Firms that are expanding and wish to borrow often do so by issuing
more shares - it provides a low cost way of borrowing more money.
However, with falling share prices it becomes much more difficult. As said
earlier, there is an often-repeated quote saying the stock market has predicted
10 out of the last 3 recessions. The point is that falling stock markets do not
necessarily predict the economic future. Share prices can fall without causing
a downturn in the economy. For example, one thinks of the stock market
crashes of October 1987; there was not an obvious economic factor causing
this share price fall. The major economies remained relatively unaffected by
this stock market crash. In fact, the UK had record growth in the late 1980s.
This time the stock market fall is due to economic weaknesses so is a better
guide to future economic performance.
2.1.8 IMPACT
OF STOCK MARKET PERFORMANCE ON THE
NIGERIAN
ECONOMY.
Without exaggerating the contributions or importance of the capital market, it
is clear that the degree to which government succeeds in achieving its
objectives depends in part, on the current use of the capital market, the
responsiveness of market players and participants to policy initiatives,
regulatory regime and moral suasion, etc.
It is also well known that the capital market, under the umbrella of the
Nigerian Stock Exchange, greatly facilitated the nation’s privatization
process.
The stock market has had a lot of impact on the economy in more ways than
one and some impacts are discussed below;
 FREEDOM TO TRANSFER FUNDS
Almost all economies with vibrant emerging capital markets have relaxed
restriction on the transfer of funds and, in respect of foreign investment, on
direct and portfolio investment. In other words, foreign investors are allowed
to bring in as well as repatriate capital and income without undue restrictions.
This promote the growth, hence development of the economy.
 AVAILABILITY OF INFRASTRUCTURE
The modern capital market thrives on the availability of accurate and reliable
data and information that are disseminated to all interested parties. This
therefore ensures efficient telecommunications, equipment to link buyers and
sellers, and the availability of computers for processing transactions rapidly.
 PRIVATIZATION OF THE MAJORS
The prospect of privatizing the Nigerian Telecommunication Limited
(NITEL), the National Electric Power Authority (NEPA), the four petroleum
refineries, the steel rolling mills, e.t.c estimated at hundreds of billions of
naira has introduced fundamental changes in the stock market outlook with
Nigerian companies quoted in foreign exchange markets. These parastatals
now work efficiently, thereby, reducing the retardation of Nigeria’s economy.
Success in privatizing these critical enterprises in the ‘commanding heights’
has changed the infrastructural landscape of the economy and enhanced
prospects for many new economic activities. It has also reduced the operating
cost of most enterprises, thus providing small and medium scale enterprises
as real chance for survival and growth.
Only an established capital market allowed us consider privatization on the
scale we did, without risking being eluded by the full benefits of it.
According to Claessens (1995), the existence of the Nigerian Stock Exchange
entails number of benefits for the Nigerian economy. The benefits are in line
with the general role of stock market in the development process.
First, the stock market has been a source of capital for the corporate sector.
With current market capitalization of about US $105.56 million, the market
represents a viable mechanism for resource allocation.
The mere presence of a stock market in the country boosts the international
investment climate as it raises the chances of additional local financing for
both foreign and loan direct investment. The stock market plays a morale
boasting role to investors especially because the banking sector is battling
with credibility problem following the distress of the financial sector.
Secondly,
the
stock
market
has
provided
opportunity
investment
diversification. A large part of wealth currently invested in Nigeria would
have been diverted to foreign countries but for the presence of the stock
market. It, therefore, remains a viable institution for holding back capital
flight thereby reducing underdevelopment of the economy.
Thirdly, the stock exchange enabled mass participation in the privatization
exercise as it did during the implementation of the indigenization program,
thereby ensuring that a large number of Nigerians benefited from the
ownership of the divested assets.
The sale of public wealth through privatization would have benefited a few
rich persons, thereby worsening income inequality if a stock market was
absent.
2.1.9 IMPORTANCE OF STOCK MARKET TO AN ECONOMY
The importance of the stock market in any economy cannot be overemphasized as it plays a major role in a nation’s economic growth and
development. It importance hinges greatly on the functions it performs and
some are listed below:
 The capital market, being a market through which medium and long
term funds are mobilized and made available to private investors
and government, provides a medium for matching economic units
with surplus savings with those who have deficit savings but desire
invisible funds.
 A well-functioning stock market will ensure that resources are
allocated efficiently amongst competing investment projects and
serve as a leading indicator of efficient economic activities in the
economy.
 The stock market facilitates transfer of enterprises from the public
sector to the private sector by increasing the marketability of new
shares
 It provides an additional channel for engaging and mobilizing
savings for productive investment and represents an alternative to
bank deposits, real estate investments, and the financing of
consumption loans.
 The stock market broadens the ownership base of assets and then the
creation of a healthy private sector through the empowerment of
asset ownership.
 The stock market provides a built in operational and allocation
efficiency within the financial system to ensure that resources are
optimally utilized at minimum transaction costs.
 It provided access to finance for new and smaller companies and
encourages institutional development in facilitating the setting up of
Nigeria’s domestic funds.
 It also provides depositors with better protection against inflation
and currency depreciation, as well as providing alternative sources
of finance other than taxation to fund public projects.
 Stock market provides sufficient liquidity for any investor or group
of investors.
 The stock market promotes rapid capital formation and real
investment culture as against hot, short term portfolio adjustments.
As the importance of the stock market has been declared through the
functions stated above, we would also like to emphasize its importance by
discussing two major but pivotal roles that the stock market plays:
 It signals the state of health of the national economy. Here, trends in
the market indicate whether the economy is headed in the right
direction or not.
 It provides a measure of the residence of the national economy by
the extent to which economic activities tell on it.
In the second role, the market serves as an active and effective balance
against the more regulated money market. Price determination is left entirely
to the inter-play of the market forces of demand and supply of stocks which
means the stock market is freer and provides a more dependable barometer of
economic health.
The most relevant importance of the stock market lies in its long-term
perspective. Every investor buys a stock with full knowledge that profit
would be realized in future from that transaction.
Another attribute is that organizations that raise capital through it do not have
to worry about maturity date and for those that raise funds through debt
instruments, the burden of repayment is over a long period that allows the
borrower to make adequate provision for eventual repayment. Moreover, the
process encourages financial discipline, through the sinking fund agreement
that a bond is structured to require.
The summary of the above functions and roles which explains the importance
of the stock market helps to stimulate industrial as well as economic growth
and development in the Nigerian economy.
2.2
EMPIRICAL LITERATURE
The stock market performance is one of the most controversial and wellstudied propositions in the literature of capital market. Even if there have
been a number of researches and journal articles, economists have not yet
reached a consensus whether the stock market performance has an impact
on the growth of the economy, ongoing debate exists as to whether stock
markets are like casinos, where more and more players are coming to
place their bets or they are actually linked to economic growth.
Robert Barro (1990) reported that in the case of U.S., stock market variables
and stock returns, can largely explain the subsequent aggregate investments,
he proved this by regressing the average growth rate in per capita output on
the market capitalization and he discovered that the stock market accounts for
a larger part of the aggregate investment in U.S.
Harris(1997) analyzed data for forty-nine countries over the period from
1980-91 for the growth in GDP per unit of effective labor, investment as a
percent of GDP, the growth of total employed labor and the total value of
shares traded on the stock market as a percent of GDP. The study reported
that the level of stock market activity has little explanatory power in the
sample of developing countries and weak explanatory power for the sample
of developed countries.
In the work of Seyyed Oskooe (2006), he studied the effect of the stock
market performance on the growth of Iran economy, using the quarterly real
GDP and the Iran stock market index as his variables, covering the period
from 1997:3-2006:3.He conducted causality test within the vector error
correction model framework, he also used Johansen co-integration analysis to
investigate whether the variables are co-integrated of the same order taking
into account the maximum eigenvalues and trace statistics test. He applied
the granger causality test in order to find the direction of causality between
the examined variables of the estimated model. He concluded, by stating that
the level of real economic activity is the main factor in the movement of
stock prices in the long run and stock market plays a role as a leading
economic indicator of future economic growth in Iran, in the short run.
According to the study of Levine and Zervos (1996), they applied regression
analysis to the data compiled from 41 countries for the years 1976 through
1993 to see the relationships between financial deepening and economic
growth. One of the financial deepening indicators used in the analysis was the
level of development of stock exchange measured by a composite index,
liquidity and diversification indicators. Economic growth indicator selected,
on the other hand, was the real growth rate in per capita GDP. Levine and
Zervos reported a very strong positive correlation between stock market
development and economic growth. The most interesting aspect of this study
was the decrease in the statistical significance of other financial deepening
variables after stock market development index was included in regression
equation. The study concluded with the proof that stock market development
is more influential than other financial deepening indicators on the growth of
the economy.
In the work of Mohtadi and Agarwal, they examined the relationship between
stock market development and economic growth for 21 emerging markets,
Nigeria inclusive, over 21 years from 1977 to 1997, using a dynamic panel
method, and they used Market capitalization ratio, total value of shares traded
ratio, turnover ratio, GDP, Foreign direct investment, Investment, Secondary
school enrollment as their variables. The model was estimated in several
different ways such as OLS, fixed effects, random effects, one way, and two
–way models. Following the tradition, Hausman test was used to test for the
appropriateness of the fixed versus random effect and F test was used to
choose between the one-way or two –way models. Their result suggested a
positive relationship between several indicators of the stock market
performance and economic growth both directly, as well as indirectly by
boosting private investment behavior. Thus they lend support both to
financial intermediation literature as well as to traditional growth literature.
Rajan and Zingales (1998) predicted the average annual real growth of value
added in an industry in the United Stated over the period from 1980-90. As
predictor variables, the study used the proportion of investments funded with
external financing and the ratio of capital spending to net property, plant, and
equipment. Industries were further divided into young and old companies.
This process helped them to differentiate industries that were more or less
dependent on external financing. The study wanted to test if financially
dependent industries perform better in countries that have more developed
financial sectors, as measures of financial development in each of forty-one
countries. The study used the ratio of domestic credit plus stock market
capitalization to GDP, the ratio of domestic credit to the private sector
relative to GDP, and an index of accounting transparency. The study revealed
that the financial development facilitates economic development by
providing cheaper funds to growing industries.
Levine and Zervos (1998) analyzed by using stock market liquidity (turnover
of shares and value), size (market capitalization), volatility (twelve month
rolling standard deviation), integration with world markets (CAPM and APT
intercept terms), and bank credit for the private (bank credit to the private
sector to GDP) as predictors of economic growth, capital accumulation,
improvement in productivity, and savings growth rates for forty-seven
countries from 1976-93. The study reveals a positive relationship between
stock market and bank development and economic growth, capital
accumulation, and productivity growth. The authors conclude that stock
markets provide an easy means to trade the ownership of productive assets,
which facilitates resource allocation, which, in turn, facilitates capital
formation, which leads to faster economic growth.
The study of Arestis, Demetriades and Luintel, 2001 found that in countries
like Germany, stock market volatility has a significant and negative impact
on growth. The study used a vector autoregressive model to study the
relationship between stock market development measures and economic
growth for developed economies, controlling for the banking sector
development. The study finds that the stock market and economic growth
both may be able to promote growth, with the impact of the banking system
being stronger. With well-functional financial sector or banking sector, stock
markets can give a big boost to economic development (Rousseau and
Wachtel, 2000; Beck and Levine, 2003).
Bell and Rousseau (2001) evaluated the relationship between individual
macroeconomic indicators and measures of financial development in India
and revealed that the financial sector has been instrumental in promoting
economic performance. Nourzad (2002) analyzed the effect of financial
development on productive efficiency using eight measures of financial
development for countries at different stages of economic development. The
study analyzed three sets of panels of data: annual data for twenty-nine
countries from 1966-90, annual data for eighteen countries from 1970-90 and
five year average data for twenty-eight countries from 1970-90. The author
finds that productive efficiency is greater in countries that have more
developed financial sectors i.e. the stock market.
According to the study carried out by Jiyoti Koirola (2007) on the
relationship between stock market development and economic growth in
Nepal. He selected Gross Domestic Product (GDP), Government Investment,
Government Expenditure, Foreign Aid, Foreign Direct Investment, Market
Capitalization Ratio , Concentration Ratio and Liquidity as his variables. He
used the augmented dickey fuller (ADF), co integration test, and granger
causality model, to test for the reliability of the parameters. And he
concluded that, there exist a strong relationship between the stock market and
the economic growth.
Mafizur and Salahudin (2007), study on the impact of stock performance on
the economic growth of Pakistan suggested a positive relationship between
efficient stock market and economic growth. They used a data for period
from 1971 to 2006; they applied the autoregressive distributive lag model,
using GNP per capita, Market Capitalization, Financial Instability which was
measured by the standard deviation of the Inflation rates, Inflation rates,
Foreign Direct Investment and literacy rate which was measured by the ratio
of the number of people completing primary education to total population, as
their variables.
Hamao et al. (1990), Koch and Koch (1991), Roll (1992), Longin and Solnik
(1995), used more sophisticated econometric techniques to measure crosscountry correlations, and found evidence of significant linkages between
stock markets around the world. Some other studies focused on the evolution
of linkages of emerging capital markets. Studies such as Harvey (1995), but
particularly Bekaert and Harvey (1995), examined one period returns and the
conditional means and variances of one period returns by examining a one
factor asset pricing model. The study concluded that the expected returns in a
country are affected by their covariance with country’ returns. The study
further concluded that if the market was perfectly integrated then only
covariance counted, while if the market was completely segmented then the
variance was the relevant measure of market risk. Bekaert and Harvey (1995)
used a conditional regime-switching model to account for periods when
national markets were segmented from world capital markets and when they
became integrated later in the sample. By applying sophisticated techniques
they found evidence of significant linkages between the stock markets around
the world.
CHAPTER THREEE
3.1 METHOD OF EVALUATION
The aim of the data evaluation was to evaluate the statistical reliability of the
estimated parameters. The criteria for decision making will be based on
examining the statistical criteria (first order test), and econometric criteria
(second order test).
3.1.1 EVALUATION BASED ON STATISTICAL CRITERIA
(First
Order Test).
(i) The Co-efficient of Determination (R2): It is a measure of the goodness
of fit of a model. It simply tells us the total variation in the independent
variable that is attributed to changes in the explanatory variable. Put
differently, R2 shows the percentage of total variation of the dependent
variable that can be explained by the independent variable.
R2 = B1
+ B2
+B3
----------bn
2
(ii)
The F-statistics: This is used to test the overall significance of a
model. It involves the ratio of 2 independent estimates of
variance. The regression equation is adequate if the f-statistic
gives a value higher than the appropriate table f-statistic, but if
the calculated f-statistic is less than the appropriate table figure (
at the chosen level of significance) found from the f-table with k1 and N-K degree of freedom, then the regression will be
significant.
(iii)
The Student T-test: It is used to determine the statistical
significance of parameter estimates. The t-statistics will be given
in parenthesis beneath its parameter estimates. A two-tailed test
would be carried out at the 1%, 5% and 10% levels of
significance. When the calculated t-value is less than the table tvalue, the parameter is not statistically significant and vice-versa.
3.1.2 EVALUATION BASED ON ECONOMETRIC CRITERIA
(Second Order Test)
(i) The Dubbin, Watson (D.W) Statistic: The D.W. test is used to test for
the presence of autocorrelation in the variables. The simple correlation matrix
of the variables would be used as a guide in determining what combinations
of the explanatory variables are responsible for multi-co linearity. It is a
simple guide used to specify the right combination of the explanatory
variables.
2
DW =
}
(et)2
Where
et = present period errors
et-1 = previous period errors
Test for Hetroscedasticity
We shall employ the White’s hetroscedasticity test see Gujarati (2004)
third Edition.
Hypothesis
Ho: (There is no hetroscedasticity, i.e. homoscedasticity)
Against
H1 (There is hetroscedasticity)
Decision Rule
Reject Ho if the calculated hetroscedasticity value which follows the Chi
Square distribution with 8 degree of freedom, otherwise accept Ho.
(ii) Jacque-Bera Residual Normality Test
The test is conducted to assert if the error term follows a normal distribution.
It follows a chi-square (2) test with two degrees of freedom (2df). The
hypothesis is stated as:
H0: i = 0; normally distributed
H1: I ≠ 0; not normally distributed
2
Decision Rule: Reject H0 if  cal
2 ( 0.05)
  tab
at 2 degree of freedom, and accept
H0 if otherwise.
Test statistics:
 s 2 (k  3) 2 
JB  n  

24 
6
Where n = sample size,
S = Skewness coefficient, and
K = Kurtosis coefficient
For a normally distributed residual, the value of S and k are 0 and 3. Since
the JB computed is expected to be zero with 2 degrees of freedom, if the
value is close to zero/the P-value reasonably high, the residuals are normally
distributed.
(iii) Test for Multicollinearity.
Multicollinearity test shall be used to ascertain the violation of the tenth
assumption of classical linear regression model. In carrying out the test, we
shall investigate the R2 and t-test. A classical symptom of multicollinearity is
that a model with R2 which is high, say in excess of 0.8, and most of the t–
value are not statistically significant, we say that the model has
multicollinearity problem.
3.2 MODEL SPECIFICATION
The main aim of the study is to examine the impact of the stock market in the
growth process of the Nigerian economy. This study therefore specifies its
model as;
GDP= f (MK, Inv, ExR, I,)
Where
GDP: Gross Domestic Product
MK: Market capitalization
Inv: Investment
ExR: Exchange rate
I: Interest rate
On the basis of a priori specification,
∂GDP / ∂MK >0
This says that there is a direct or positive relationship between GDP and
market capitalization. A growth in market capitalization is indicative of
greater financial interest of the populace in the real sector, which will serve to
boost GDP.
∂GDP / ∂Inv >0
Gross domestic product is a direct function of investment, both private and
public. Investments either result in greater output, or they facilitate lower cost
and therefore greater efficiency.
∂GDP / ∂ExR >0
The above specifies a positive relationship between GDP and exchange rate.
The greater the price of other currencies relative to naira, the more favorable
Nigerian goods will be in the international market and this will boost national
income.
∂GDP / ∂I <0
There exists an inverse relationship between gross domestic product and
interest rate. This is because a rise in interest rate will discourage firms and
individuals from taking loans and this would affect investment negatively,
therefore militating against production/productivity.
Specifying it in an explicit form, we have
GDP= α0+ α1MK+ α2Inv + α3ExR+ α4Int+Ut
Where,
α1>0,
α2>0,
α3>0,
α4<0, and
Ut = error term.
3.3 DATA REQUIRED AND SOURCES
Data used in this research project are secondary data. The data used were
gotten form authentic sources, some of which are listed below:
-Nigerian Stock Exchange fact book;
-Nigerian Stock Market annual;
-Publications and journals from reputable
- CBN Statistical Bulletin
CHAPTER FOUR
PRESENTATION AND ANALYSIS OF RESULT
Introduction
Most time series data tend to contain infinite variances that are not
mean- reverting and lie on the unit circle. Equation estimated from such series
result in spurious regression that makes little economic sense. Indeed the
loading of the endogenous variable is minuscule when in fact a long -run
relationship exists between it and the economic fundamentals driving it. Thus
each of the variables would be examined for unit root and co integration.
Consequently, the Augmented Dickey – Fuller (ADF), defines the equations
for these tests.
4.1 ADF Test for Stationary
Employing the Augmented Dickey-Fuller test, unit roots test was run
on the variables up to their 2nd differences with the following result:
Table 4.1: Unit Root Test (ADF-test)
Variable
Lag
Critical Values
First
length
5%
1%
Differencing differencing
DDLGDP
2
-1.957
-2.67
-
-5.2697**
DDLGDP
1
-1.957
-2.67
-
-4.3401**
DDLGDP
0
-1.957
-2.67
-
-6.2457**
DDLMC
2
-1.957
-2.67
-
-4.1460**
DDLMC
1
-1.957
-2.67
-
-4.4705**
DDLMC
0
-1.957
-2.67
-
-5.3519**
DDLINR
2
-1.957
-2.67
-
-4.3329**
DDLINR
1
-1.956
-2.665
-3.0821**
-
DDLINR
0
-1.956
-2.665
-4.7463**
-
DLRINT
2
-1.956
-2.665
-3.9000**
-
DLRINT
1
-1.956
-2.665
-4.3171**
-
DLRINT
0
-1.956
-2.665
-4.9513**
-
DDLEXR
2
-1.957
-2.67
-
-4.0322**
DDLEXR
1
-1.957
-2.67
-
-5.4646**
DDLEXR
0
-1.956
-2.665
-3.4027**
-
NB** indicate significance at the 5% & 1% levels.
Second
From the above table, the two right hand side shows the order of
integration of the variables. The dash sign shows no stationary at that level.
This result revealed that some variables (explanatory variables) were of the
same order with the dependent variable. That is, they were made stationary
after second differencing. Thus we can say they are integrated of order I ~
(2). Therefore, the evidence of co-integration was shown from the order of
integration presented above, which proves that the dependent variable has the
same order with some explanatory variables, and for this reasons, we conduct
co-integration test as shown below.
4.2 Co integration Test
Given the unit root properties of the variables, we proceeded to
implement the Engle-Granger co-integration procedure. Since gross domestic
product (dependent variable) have the same order of integration with some of
the explanatory variables, we estimate their linear combination at level form
without the intercept and obtain their residual which is then subjected to co
integration test as show in Table 4.2.
Table: 4.2 co integration result
t-adf
5%
value
crit 1%
crit
value
Residual -1.9587 -1.955
-2.66
Residual -1.7520 -1.955
-2.66
Residual -1.6282 -1.955
-2.66
The result presented in table 4.2 shows that there is no presence of co
integration among the variables because the residual obtained from the linear
combination of the non-stationary variables in question were not stationary at
both 5% and 1% critical value. However, this led us to dropping the Error
Correction Model (ECM) and make used of the formal model.
4.3
Presentation of the model result
The summary of the model’s result is presented in this section.
Table 4.3 Result Summary Modeling GDP
Variable Coefficient
s
t-
s
Std. Error Statistic
Prob.
12.804
0.11594
110.434
0.0000
0.12657
0.011921
10.618
0.0000
0.00061
0.000648
0.942
0.3567
0.096375
0.012493
7.714
0.0000
0.076674
0.017689
4.335
0.0003
Constan
t
MC
RINT
INR
EXR
R2 =0.982194, DW =1.95, F-Stat= 289.59
4.4 Interpretation of Result
Market Capitalization (MC)
Market Capitalization variations in the current year have a positive
coefficient of 0.12657. This finding implies that the current value of variation
in market capitalization indicator increases gross domestic product. That is a
unit increase in market capitulation variation will lead to an increase in the
gross domestic product by 0.12657 units. In other words as variation in
market capitalization is increasing, gross domestic product is also increasing.
Therefore, using the 2-t Rule of thumb, variation in market capitulation is
statistically significant judging from the t-value of 10.618 which is greater
than 2 in absolute value at 5% level of significance. This result suggests that
the variation in market capitulation as a growth instrument appeared to have a
meaningful impact on the growth of gross domestic product in Nigeria.
Real Interest Rate (RINT)
The variation in real interest rate possesses non-robust coefficients of
0.00061. This implies that a unit increase in real interest rate causes gross
domestic product to increase by 0.00061 units, all things being equal. The
minor responds of this result is further confirmed by its t-value of 0.942
which is less than 2 in absolute value at 5% level of significance following 2t Rule of Thumb. Though the finding here imply that positive variation exist
between real interest rate and economic growth, it can be observes not to be
in conformity with theories. As high interest rate reduces the incentive to
borrow as well as investment which transmits to low growth in the economy.
Investment Rate (INR)
Variation in investment coefficient is positive; this positive value of 0.096375
displays by investment variation implies that a unit increase in investment
variation causes gross domestic product to increase by 0.096375 units. In
other words, investment variation is an effective macroeconomic instrument
for maintaining growth in growth domestic product. This result is evidence in
the t-value that is statistically significant at 7.714.
Exchange Rate (EXR)
The positive coefficient of exchange rate shows that it has a positive
influence on gross domestic product. The result proves that a unit increase in
exchange rate will lead to an increase in the gross domestic product by
0.076674 units. In other words, as variation in exchange rate is increasing,
gross domestic product is also increasing. Again, using the 2-t rule of thumb,
variation in exchange rate is statistically significant judging from the t-value
of 4.335 which is greater than 2 in absolute value at 5% level of significance.
This result suggests that the variation in exchange rate appears to have a
meaningful impact on the growth of gross domestic product in the Nigerian
economy.
4.5
Statistical Criteria (First – Order Test)
These tests are determined by statistical theory and aims at evaluating the
statistical reliability of the estimates and parameters of the model
(Koutsoyiannis, 1977). From the sample observation, the first order test is
carried out based on the following: R2, t – probability (t – prob) and F – test.
Coefficient of Determination (R2)
In our model, R2 = 0.982194, which implies that approximately 99% of the
variation in the dependent variable (GDP) is explained by the variations in
the explanatory variables. Judging by the size of the coefficient of
determination (R2), 99% shows a good fit for the model. Meaning that 99%
variations is explained in the model leaving around 1.28% variations in the
model unexplained.
Student t – Test
In this section, we use t – statistics to test for the individual significant of the
parameters. The significance of the result is shown below:
Hypothesis
Ho: the parameter is not statistically significant
Hi: the parameter is statistically significant
Decision Rule
Reject Ho if t-cal t-tabulated
Otherwise, Accept Ho
α = 0.05%
1 – 0.05% = 95 level of confidence
df = degree of freedom = (K – 1)
Where K = no of parameter
df = 5 – 1 = 4
T = tabulated = 2.132
Conclusion,
The student- t test result above suggests that all the variables except
real interest rate are statistical significance as indicated in the remark column
below.
Table 4.3: Significance Test
Variables
Constant
Coefficients
12.804
T-
T-
Value
Tabulated
110.434 2.132
RESULT
Significant
MC
0.12657
10.618
2.132
Significant
RINT
0.00061
0.942
2.132
Not
Significant
INR
0.096375
7.714
2.132
Significant
EXR
0.07664
4.335
2.132
Significant
F – Test
The F – test is conducted to ascertain if the model is statistically
significant and to know if the data actually fit into the model to enable us
ascertain the adequacy of the model for our analysis.
Hypothesis
Ho: b1 = b2 = b3 = bn = 0 (the model is not significant)
H1; b1  b2 b3  bn  0(the model is significant)
Where  = 0.05 (At 5% level of significance.
Decision Rule
Reject Ho if F* > F0.05
Otherwise Accept Ho if F* < F0.05
F (4, 21) = 289.59 {0.0000}
F. table = 2.84
Conclusion
Since F* calculated is > F – tabulated we reject Ho and conclude that
the model is statistically significant.
4.6
Evaluation based on Econometric Criteria (second order Test)
These tests are based on econometric theory and are aimed at finding out
whether the underlying assumptions of OLS regarding the estimation of time
series data are satisfied.
Test for Auto Correlation
The Durbin Watson test shall be employed to test for the violation of
the fourth assumption of Ordinary Least Square.
Hypothesis Test
Ho: P = 0 (the U’s are not auto correlation)
Against
H1: P  0 (the U’s are auto correlation)
Decision Rule
Reject Ho if d < (4 – du) negative auto correction or 4 d” < du (positive auto
correction), otherwise accept Ho (i.e. d” lies between du and 4 – du … (du <
d” < 4 – du). Note that du is the upper limit of Durbin Watson table for
corresponding values of n and k.
Conclusion
Given that d” from the Durbin Watson is 1.95, du from the table is
1.80, we conclude thus: Since d” (1.95) > du (1.80) we accept Ho and
conclude that there is no positive auto correction at 5% level of significance.
Test for Hetroscedasticity
We shall employ the White’s hetroscedasticity test see Gujarati (2004)
third Edition. This test is basically focused on the variance of the error term.
The test helps to ascertain whether the variance of the error term is constant.
Hypothesis
Ho: (There is no hetroscedasticity, i.e. homoscedasticity)
Against
H1 (There is hetroscedasticity)
Decision Rule
Reject H0 if X2˃X20.05 and accept if otherwise. From our result, the calculated
Calculated chi square = 13.903 and tabulated chi square = 15.5.
Therefore, since the calculated value of 13.903 is less that tabulated value of
15.5 we accept Ho of homoscedasticity or equal variance of the error terms.
Test for Multicollinearity.
Multicollinearity test shall be used to ascertain the violation of the tenth
assumption of classical linear regression model. In carrying out the test, we
shall investigate the R2 and t-test. A classical symptom of multicollinearity is
that a model with R2 which is high, say in excess of 0.8, and most of the t–
value are not statistically significant, we say that the model has
multicollinearity problem. We conclude based on empirical findings as
guided by the above decision rule, that the model is free from
multicollinearity problem having all the variables except one statistically
significance.
Jacque-Bera Residual Normality Test
The test is conducted to assert if the error term follows a normal distribution.
It follows a chi-square (2) test with two degrees of freedom (2df). The
hypothesis is stated as:
H0: i = 0; normally distributed
H1: I ≠ 0; not normally distributed
2
Decision Rule: Reject H0 if  cal
2 ( 0.05)
  tab
at 2 degree of freedom, and accept
H0 if otherwise.
Test statistics:
 s 2 (k  3) 2 
JB  n  

24 
6
Where n = sample size,
S = Skewness coefficient, and
K = Kurtosis coefficient
For a normally distributed residual, the value of S and k are 0 and 3. Since
the JB computed is expected to be zero with 2 degrees of freedom, if the
value is close to zero/the P-value reasonably high, the residuals are normally
distributed
From the result obtained form Jarque-Bera (JB) Test of Normality, JB =
2
0.49601 which is shown in appendix, and from chi-square table  tab
=
2
2 ( 0.05)
5.99147. Therefore, since  cal
= 0.49601 <  tab
= 5.99147 at 5% level of
significance, and for this reason, we accept H0 and conclude that the error
terms followed a normal distribution.
4.7
Evaluation of Hypothesis
Hypothesis 1
H0 the growth of stock market has no significant impact on the growth of
Nigerian economy.
Conclusion: Based on the various test conducted, we reject Ho and accept H1
and conclude that the growth of stock market has a significant impact on the
growth of Nigerian economy.
Hypothesis 2
H0 changes in investment links have no significant impact on the growth of
Nigeria’s stock exchange.
Conclusion: We reject Ho and accept H1 and conclude that changes in
investment link have a significant impact on the growth of Nigeria’s stock
exchange.
CHAPTER FIVE
SUMMARY, CONCLUSION AND POLICY RECOMMENDATION
5.1 Summary
This study is an investigation of the impact of Nigeria stock exchange
performance on the economic growth of Nigeria. To accomplish these
objectives, an econometric methodology was adopted as a tool for testing the
stated hypothesis. The ordinary least square was chosen as the estimation tool
because of the advantages it has over other estimation technique considering
the phenomenon under study.
The result of the student - t test revealed that the coefficient for market
capitalization, investment rate and real exchange rate are all statistical
significant at 5 percent level of significance. But the coefficient of real
interest rate were not statistically significant at 5 percent level of significance
The R2 which is the coefficient of multiple determination also revealed that
99 percent of the variation in the dependent variable is caused by the
variation in the explanatory variables. The F test result suggested that the
model is statistically significant.
It was further revealed from the econometric second order test that the model
is free from the problem of Hetroscedasticity, Auto correlation and
Multicollinearity, and was equally, normally distributed.
5.2 Conclusion
In conclusion, we state that stock market development has played a
major role in any economic development of Nigeria. And that Nigeria has
witnessed tremendous growth in the stock exchange market. Nevertheless, to
draw a better conclusion to this study, the following according to
USAID/Nigeria: Economic Growth Strategy reports revealed by David T.
King, (2003) are the key strength and weakness of Nigerian Stock Exchange
market.
Strengths:
 It has shown substantial growth in new issues volume in recent years
 It is reasonably well-supervised by the SEC and has a well-organized
management structure
 It has an automated trading system, T+3 clearing and settlement
system, and central depository, and a good website
 Investor protection has been recently improved with the establishment
of an Investment and Securities Tribunal with supreme judicial
authority over the capital markets
 The exchange is seeking to develop new products, particularly those
that would appeal to foreign investors, such as instruments for
investing in the upstream oil sector. It is courting foreign investors,
including a recent well-attended road show at the New York Stock
Exchange.
 Though not universally strong, there is a core group of professionally
capable brokers.
Weaknesses:
 Transactions costs are extremely high – approximately three percent on
both sides of the transaction (so that the issue cost is seven percent) –
inhibiting new issues and the development of secondary market.
 A small number of stocks represent the great majority of market
capitalization and trading. IPOs are extremely rare – essentially the
same set of companies has been trading for most of the past decade.
This is due in part to the reluctance of companies to access the stock
market, because of the requirement that they divulge their financials.
However, the exchange is also criticized as being insufficiently inviting
to new companies, with undue and expensive red tape requirements and
slow responsiveness.
 Though trading system is automated, NSE has proven unprogressive in
permitting remote trading capability, though this is said to be coming
out soon. Presently brokers are forced to trade on the floor of the
exchange.
 There are undesirable routine practices in exchange operations – rentseeking in the issuance process, and insider and proprietary trading is
fairly common. NSE supervision of brokers is overly paternalistic,
sometimes dictatorial.
5.3 Policy Recommendation
Empirical research has proved that stock market development is crucial for
sustainable economic development. This finding has also been substantiated
by empirical result on stock market development and economic growth in
Nigeria. Based on this fact, we make the following policy suggestions:
The full liberalization of the financial sector is a crucial condition for
efficient functioning of any financial system. The total liberalization of the
financial sector is needed if the country’s dream of becoming one of the first
twenty economies of the world is to be achieved.
 The activities of the Nigeria stock exchange should be made more
transparent as this will bring about confidence in the mind of investors
and people will be encourage to investment.
 The Nigeria security and exchange commission has a crucial role to
play in ensuring that only firms with good financial standing are
allowed to appear in the stock market.
 The government should encourage Nigerians to take advantage of the
stock market and save for investment growth and capital formation in
Nigeria.
 Finally, the current efforts at eradicating corruption completely in
Nigeria should be encouraged for this also influences capital inflow
into the country.
5.4
SUGGESTIONS FOR FURTHER STUDIES
This study has looked at the impact of the Stock Market Performance on the
growth of the Nigerian economy. It is not all encompassing in its scope and
further research is required in the following areas:
1.
There is a need for further research to examine and discuss the role of
government in increasing the efficiency of the stock market.
2.
It is also appropriate to examine the significance of other variables
which may affect the market/ GDP other than the ones examined in
this study.
3.
The thickness and thinness of the stock market should also be
examined and discussed as relatively thin markets causes inefficiency
in price determination.
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APPENDIX
year
1980
GDP
31546.8
MC
INR
4.8
3620.1
RINT EXR
-2.4
0.5464
-13.15
0.61
3757.9
1981
205222.1
5
1982
199685.3
5
5382.8
2.55
0.6729
1983
185598.1
5.7
5949.5
-13.2
0.7241
1984
183563
5.5
6418.3
-27.1
0.7649
1985
201036.3
6.6
6804
3.75
0.8838
1986
205971.4
6.8
5313.6
5.1
2.0206
1987
204806.5
8.2
9993.6
7.3
4.0179
1988
219875.6
10 11339.2
-21.8
4.5367
1989
236729.6
12.8 10899.6
-14.1
7.3916
1990
267550
16.3 10436.1
18
8.0378
1991
265379.1
23.1 12243.5
7.01
9.9095
1992
271365.5
31.2 20512.7
1993
274833.3
47.5
1994
275450.6
66.3 70714.6
1995
281407.4
180.4
119392 -52.62 21.8861
1996
293745.4
285.8
122601
-9.56 21.8861
1997
302022.5
281.9
128332
5.04 21.8861
1998
310890.1
262.6
152410
8.29 21.8861
1999
312183.5
300
154189 14.72 92.6934
2000
329178.7
472.3
157535 11.08 102.1052
2001
356994.3
662.5
162343
2002
433203.5
764.9
166032 11.95 120.9702
-14.7 17.2984
66787 -38.88 22.0511
-36 21.8861
-0.61 111.9433
2003
477533 1359.3 17450.3
6.71 129.3565
2004
527576 2112.5 23654.1
4.18 133.5004
2005
561931.4 2900.1 26846.6
0.05 132.147
2006
595821.6
8.69 128.6518
2007
634251.1 13294.6 36854.2 11.54 125.8331
5121 32546.8
---- PcGive 8.00, copy for meuller
----
---- session started at 6:41:52 on 28th May 2010 ----
Data loaded from: Femi.wks
LGDP = log(GDP);
LMC = log(MC);
LINR = log(INR);
LEXR = log(EXR);
DLGDP = diff(LGDP, 1);
DLMC = diff(LMC, 1);
DLINR = diff(LINR, 1);
DRINT = diff(RINT, 1);
DLEXR = diff(LEXR, 1);
Unit root tests 5 to 28
Critical values: 5%=-1.956 1%=-2.665
t-adf
å lag
t-lag t-prob
DLGDP
-1.4181
0.053125 2
-0.72506 0.4764
DLGDP
-1.6204
0.052550 1
-0.67704 0.5054
DLGDP
-2.1160*
0.051927 0
DLMC
-0.10182
0.27200 2
-1.2951 0.2093
DLMC
-0.56581
0.27616 1
-0.51082 0.6146
DLMC
-0.87632
0.27168 0
DLINR
-2.5352*
0.60479 2
0.028357 0.9776
DLINR
-3.0821**
0.59089 1
-0.33883 0.7380
DLINR
-4.7463**
0.57941 0
DRINT
-3.9000**
17.390 2
1.0421 0.3092
DRINT
-4.3171**
17.424 1
1.1886 0.2473
DRINT
-4.9513**
17.580 0
DLEXR
-1.7467
0.40032 2
-0.76134 0.4549
DLEXR
-2.3501*
0.39648 1
-0.68705 0.4992
DLEXR
-3.4027**
0.39190 0
DDLGDP = diff(DLGDP, 1);
DDLMC = diff(DLMC, 1);
DDLINR = diff(DLINR, 1);
DDLEXR = diff(DLEXR, 1);
Unit root tests 6 to 28
Critical values: 5%=-1.957 1%=-2.67
t-adf
å lag
t-lag t-prob
DDLGDP
-5.2697**
0.048965 2
2.5627 0.0186
DDLGDP
-4.3401**
0.055075 1
0.77383 0.4477
DDLGDP
-6.2457**
0.054571 0
DDLMC
-4.1460**
0.26425 2
1.3970 0.1777
DDLMC
-4.4705**
0.27017 1
1.4267 0.1684
DDLMC
-5.3519**
0.27646 0
DDLINR
-4.3329**
0.68845 2
1.0687 0.2980
DDLINR
-5.4419**
0.69077 1
1.4122 0.1725
DDLINR
-8.4753**
0.70621 0
DDLEXR
-4.0322**
0.43318 2
0.73075 0.4734
DDLEXR
-5.4646**
0.42834 1
1.6050 0.1234
DDLEXR
-7.4353**
0.44342 0
EQ( 1) Modelling LGDP by OLS
The present sample is: 1 to 28
Variable
Coefficient Std.Error t-value t-prob PartRý
LMC
0.41622
0.24605 1.692 0.1032 0.1027
LINR
1.2533
0.058696 21.352 0.0000 0.9480
LEXR
-0.84034
0.30173 -2.785 0.0101 0.2368
Rý = 0.991266 å = 1.23966 DW = 0.471
* Rý does NOT allow for the mean *
RSS = 38.41900938 for 3 variables and 28 observations
Residual added to database
Residual = Residual values of equation 1
Unit root tests 4 to 28
Critical values: 5%=-1.955 1%=-2.66
t-adf
å lag
t-lag t-prob
Residual
-1.9587*
0.74325 2
0.91431 0.3705
Residual
-1.7520
0.74060 1
0.70928 0.4853
Residual
-1.6282
0.73289 0
EQ( 7) Modelling LGDP by OLS
The present sample is: 3 to 28
Variable
Coefficient Std.Error t-value t-prob PartRý
Constant
LMC
12.804
0.11594 110.434 0.0000 0.9983
0.12657
0.011921 10.618 0.0000 0.8430
DRINT
0.00061101 0.00064835 0.942 0.3567 0.0406
LINR
0.096375
0.012493 7.714 0.0000 0.7392
LEXR
0.076674
0.017689 4.335 0.0003 0.4722
Rý = 0.982194 F(4, 21) = 289.59 [0.0000] å = 0.05394 DW = 1.95
RSS = 0.06109997625 for 5 variables and 26 observations
Residual correlogram
26*(Sum of 4 squared autocorrelations) = 2.843
-1
0
1
lag
ÚÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
ÄÄÄÄÄÄ¿
1 ³.........................³.........................³ 0.007198
2 ³.....................****³.........................³ -0.19759
3 ³.........................³.........................³ 0.013161
4 ³.........................³*******..................³
0.26473
ÀÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÁÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
ÄÄÄÄÄÄÙ
Autoregression for Residual: 4 lags from 1 to 4
The present sample is: 7 to 28
Constant
Lag 1
Lag 2
Coeff. 5.884e-005 0.02038
Lag 3
Lag 4
-0.1325 0.01324
0.2374
Std.Err 0.01199
0.2355
0.2382
0.2401
0.236
RSS = 0.0528023563 å = 0.0557317 Rý = 0.0870998
F(4, 17) = 0.405493 [0.8021]
Testing for Error Autocorrelation from lags 1 to 2
Chiý(2) = 1.0031 [0.6056]
and F-Form(2, 19) = 0.38121 [0.6881]
Error Autocorrelation Coefficients:
Lag 1
Lag 2
Coeff. 0.006114 -0.2021
Testing for ARCH from lags 1 to 1
Chiý(1) = 0.22071 [0.6385]
and F-Form(1, 19) = 0.16924 [0.6854]
ARCH Coefficients:
Constant
Lag 1
Coeff. 0.002128 0.09508
Std.Err 0.0009015
0.2311
RSS = 0.000234597 å = 0.00351386
Normality test for Residual
The present sample is: 3 to 28
Sample Size
Mean
26
0.000000
Std.Devn.
0.048477
Skewness
0.273699
Excess Kurtosis
-0.351067
Minimum
-0.078028
Maximum
0.117720
Normality Chiý(2)= 0.49601 [0.7804]
Testing for Heteroscedastic errors
Chiý(8) = 13.903 [0.0843]
V01=LMC
and F-Form(8, 12) = 1.724 [0.1904]
V02=DRINT
V03=LINR
V04=LEXR
Heteroscedasticity Coefficients:
Constant
V01
V02
V03
Coeff.
0.06886 -0.00418 3.537e-005
t-value
0.5113
V02ý
-1.142
V03ý
0.7874
V04
V01ý
-0.013 0.001164 0.0001817
-0.4992
0.5137
0.6542
V04ý
Coeff. 9.556e-007 0.0006826 0.0004363
t-value
0.5265
0.5657
1.149
RSS = 0.000110155 å = 0.00302978
Test of Functional Form
Chiý(14) = 17.538 [0.2287]
V01=LMC
and F-Form(14, 6) = 0.88818 [0.6033]
V02=DRINT
V03=LINR
V04=LEXR
Heteroscedasticity Coefficients:
Constant
V01
V02
V03
V04
V01ý
Coeff.
0.2581 -0.01468 0.0005259 -0.05606 0.03448 0.000604
t-value
0.9308 -0.4696
V02ý
V03ý
0.6224 -0.9425
0.8186
0.4613
V04ý V02 * V01 V03 * V01 V03 * V02
Coeff. 2.383e-007 0.003292 0.002025 9.955e-005 0.0003268-7.977e-005
t-value 0.09355
1.011
0.5596
0.9239
V04 * V01 V04 * V02 V04 * V03
Coeff. -0.0001306-1.276e-005 -0.003752
t-value -0.0331 -0.1712 -0.8172
RSS = 7.70605e-005 å = 0.00358377
RESET test for adding Yhat^2
RESET F( 1, 20) = 0.10276 [0.7519]
0.1127
-0.715