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Abdul Hakeem, SA’ADU

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  • Name: IMPACT OF CAPITAL MARKET PERFORMANCE ON ECONOMIC GROWTH IN NIGERIA
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ABSTRACT

This study examines the impact of Capital Market performance on economic growth of Nigeria for the period 1983 – 2010. Economic growth was proxied by gross domestic product while capital market performance was measured by market capitalization, total new issues, volume of transaction and listed equities. Data was collected using secondary source of data only. The technique employed was multiple regression as tool of analysis for the study. The findings of the study shows that the capital market performance has positively and significantly impacted on the Nigerian economy within the period of the study (1983- 2010). The study therefore, recommends among others that the Central Bank of Nigeria (CBN), the Nigerian Stock Exchange (NSE) and Security and Exchange Commission (SEC) should ensure free flow of information in the market. This is necessary in order to attract more investors and increase new issues which will automatically increase the quantum of market capitalization that will result in improving the performance of the Nigerian capital market.

TABLE OF CONTENTS

Title Page…………………………………………………………… i
Declaration…………………………………………………………… ii
Certification…………………………………………………………. iii
Dedication…………………………………………………………… iv
Acknowledgement………………………………………………….. v
Abstract……………………………………………………………… vi
Table of Contents…………………………………………………….. vii
i
CHAPTER ONE: INTRODUCTION
1.1 Background to the study ……………………………………. 1
1.2 Statement of the problem …………………………………… 5
1.3 Research questions …………………………………………. 6
1.4 Objectives of the study………………………………………. 7
1.5 Hypotheses of the study……………………………………… 7
1.6 Significance of the study ……………………………………. 8
1.7 Scope of the Study …………………………………………… 9 CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction …………………………………………………. 10
2.2 Concept of Capital Market Variables………………………… 10
2.3 Review of Literature in the Concept of Capital Market Variable … 15
2.4 Review of Empirical Studies on the Capital Market and Economic Growth ……………………………………………………. 19
2.5 Review of Empirical Studies on the Capital Market and Gross Domestic Product …………………………………………………. 30
x

2.6 Contribution of the Capital Market to Economic Growth of Nigeria… 36
2.7 Analysis of the Nigerian Capital Market’s Performance………….. 37
2.8 Theories of Economic Growth……. ………………………….…… 39
2.9 Theoretical Framework…………………………………………… 41
2.10 Summary…………………………………………………………. 42
CHAPTER THREE: RESEARCH METHODOLOGY
3.1 Introduction……………………………………………………… 44
3.2 Research design…………………………………………………. 44
3.3 Population and Sample Design………………………………… 44
3.4 Sources of Data Collection ……………………………………. 45
3.5 Technique of Data Analysis…………………………………… 45
3.6 Variable Measurement………………………………………… 46
3.7 Decision Criteria………………………………………………. 47
3.8 Robustness Test……………………………………………….. 47
3.9 Justification of Methods and Techniques…………………….. 48
3.10 Summary……………………………………………………… 48
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.1 Introduction………………………………………………….. 49
4.2 Basic Statistic……….……………………………………….. 51
4.3 Descriptive Statistic….………………………………………. 51
4.4 Correlation Matrix…….……………………………………… 53
4.5 Test of hypotheses…………………………………………….. 54
4.6 Policy Implication of the Findings…………………………… 59
4.7 Summary of the Chapter…………………………………….. 61
xi

CHAPTER FIVE: SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Summary………………………………………………….. 63
5.2 Conclusion………………………………………………… 64
5.3 Recommendations………………………………………… 66
5.4 Limitation of the Study……………………………………. 67
5.5 Areas for further Study……………………………………… 68
Bibliography……………………………………………….. 69
Appendix…………………………………………………… 77

CHAPTER ONE

INTRODUCTION 1.1 Background to the study
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. Capital formation entails
accumulated savings out of the current incomes of either organization or
individual. It is investment in fixed assets which in part is financed with monies
raised through the capital market (Al-Faki, 2006). The Capital market has been
one of the major means through which foreign funds are injected into most
economies and the tendency towards a global economy is more 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 the overall
economic growth of a nation (Emenuga, 1998).

The development of the capital market has generated two major sets of
economic benefits. First, it has improved the allocation of capital, because the
prices of corporate debt and equity respond immediately to shifts in demand and
supply, changes in the outlook for an industry (and/or company) are quickly
embodied in current asset prices. The signal created by change in price of a
security encourages investors as a result of higher prices or discourages them
2

due to lower prices; this is because the investors often used the prices of
securities to predict the likely trend of the market as either bullish or bearish.
Businesses with high returns attract additional capital quickly and easily. When
there is decline in demand, prices drop, and this signal makes investors to cut
the flow of capital to the industry which leads to a decline in economic growth.
The ability of companies in their early stages of development to raise funds in
the capital markets is also beneficial because it allows these companies to grow
very quickly. This growth in turn results into general increase of output in the
economy (Abdullahi, 2005).

Although interest in identifying a formal link between financial system and
economic growth is fundamental, the basic intuition behind this relation is
relatively easy to surmise. This is because of the fact that the main goal of the
capital market is the channeling of funds from the surplus sector unit to the
deficit sector unit of the economy. It plays a major task in human capital
investments which are essential elements of economic growth and development.
From this point of view, one should expect that as the capital market develops
and deepens, then efficient allocation of the financial resources for the
investment is facilitated and thus the frontier of production possibilities is
increased (Adam & Sanni, 2005).

3

Economic growth in a modern economy hinges on an efficient financial sector
that pools domestic savings and mobilizes foreign capital for productive
investments. Financial markets play an important role in the mobilization of
financial resources for long term investment through financial intermediation.
The financial market, which comprises the capital and money markets as well as
other submarkets, plays crucial roles in the functioning of any modern
economy. However, for the purpose of this research work emphasis will be on
the capital market. The capital market is believed to be an important sector of
every economy whether it is developed or developing. This is because of the
fact that the capital market performs a vital role in the growth of the economy
by providing the avenue through which foreign investors make investment in
the country which in turn may boost the growth of the economy in terms of
foreign Direct Investment (Daniel, 1999).

The capital market mobilizes long-term debt and equity finance for
investments in long-term assets. Capital markets also help in boosting the
financial system as well as improving the economic growth of a country. The
capital market supplements traditional lending activities of the financial
institutions such as banks by providing risk capital (equity) and loan capital
(debt). By means of these instruments, the market is able to mobilize long
4

term savings and provide capital to investors to finance long-term investments
thereby broadening ownership of productive assets (Daniel, 2004).
Dealers in the securities segment of the capital market include banking
institutions, stockbrokers, investment and merchant bankers and venture
capitalists that intermediate between the market and the public. Well
functioning financial markets are very crucial for the promotion of global
financial integration. An efficiently functioning domestic financial market can
better position a country’s competitiveness in the markets for global capital
(Senbet & Otchere, 2005).

Accessing global markets for capital, through a well-functioning financial
system, lessens a country’s reliance on foreign aid and other forms of external
borrowing. It has been pointed out by a number of financial analysts that
financial globalization allows for the sharing of local security risks.

Given the benefits associated with having well-functioning financial systems, a
number of African countries have endeavored to put in place various measures
aimed at developing the financial sector. Financial sector reforms have
therefore been widely used as policy measures to encourage the development
5

of domestic financial systems as well as the dismantling of barriers to
international capital flows. African financial markets have been increasingly
integrated with the other world capital markets. The encouraging drive
towards globalizing capital flows in Africa has led to the growing relevance of
emerging capital markets in the continent (Harris, 1997).
The impact of the capital market performance is determined by a number of
elements, which include how financial assets are priced, such as the size of the
stock market, market capitalization, number of listed equities, transactions in
buying and selling of securities (liquidity) which in this case refers to the
volume of transactions and new issues of securities.
This study therefore poses to examine the impact of capital market performance
on economic growth in Nigeria.

1.2 Statement of the problem
Nigerian capital market has undergone a series of reforms all with the hope of
creating a stable economic growth and development. The most recent reform
was carried out in order to provide opportunities for greater fund mobilization,
improved efficiency in resource allocation and provision of relevant
information for appraisal. It is expected as a result of the reform the market
can provides variety of financial instruments capable of enabling economic
6

agents to pool, price and exchange risk. In spite of these vital roles that the
reform is expected to play, there is however a great concern on the
performance of the Nigerian capital market in relation to the economic growth
and development which when viewed from the nature of activities taking place
in the market appeared superficial. This may probably be attributed to lack of
providing enabling framework that sustained confidence and investors’
protection and also thorough evaluation of factors that are of significance
relevance in determining capital market performance.

Although from economic perspective distinction exists between economic
growth and development, most of the studies conducted in the area under
study fail to take into consideration the difference and also the
interrelationship between the two variables. This therefore triggers the need
to investigate the situation bearing in mind the distinction and also
appropriateness of the methodology under study. To the best of our
knowledge, studies conducted in the area show mixed conflicting results and
this could probably be attributed to failure to adopt appropriate methodology.
Another issue of concern is most of the studies that evaluate capital market
performance are either on data of primary market or secondary market and
used to infer on the overall capital market performance but not on the
7

combination of the two markets’ data in aggregate. This informs the need to
evaluate the market on aggregate data basis in order to ascertain how
influential it is on the economic growth of Nigeria.

1.3 Research Questions
Based on the broad statement of the problem the following research
questions were raised:
i. To what extent does market capitalization impact on gross domestic
product?
ii. How does total new issues affect gross domestic product in Nigeria?
iii. To what extent does the volume of transaction in the capital market
contribute to the Gross Domestic Product in Nigeria?
iv. To what extent does total listed equity in the capital market contribute to
the Gross Domestic Product in Nigeria?

1.4 Objectives of the study
The main objective of the study is to examine the impact of capital market
performance on economic growth in Nigeria. However the specific objectives
are to:
i. Determine the impact of market capitalization on the Gross Domestic
Product (GDP).
8

ii. Assess the effect of total new issues on the gross domestic product.
iii. Identify the contribution of the volume of transaction to the gross
domestic product in Nigeria.
iv. Examine the impact of total listed equities stocks on the gross domestic
product in Nigeria.
1.5 Hypothesis of the study
In line with the objectives of the study the following hypotheses have
been formulated in null form:
H01: Market capitalization has no significant impact on Nigeria’s gross
domestic product.
H02: Total new issues have no significant effect on Nigeria’s gross
domestic product.
H03: Volume of transaction has not significantly affected Nigeria’s
gross domestic product.
H04: Total listed equities have no significant impact on Nigeria’s gross
domestic product.

1.6 Significance of the study
It is a noted fact that for any meaningful economic transformation of a country
to take place, the capital market must be effectively active. It has also been an
acknowledged fact that the economic strength of any nation is measured
9

according to how actively and effectively the capital market is performing
(Adamu, 2008).
The study will be of immense significance to regulatory authorities such as the
CBN, NSE and SEC in coming up with sound financial policies and reforms that
will boost the performance of the capital market. This would strengthen public
companies by ensuring that corporate governance practices in Nigerian public
companies are aligned with international best practices through improved
financial disclosure of information and adoption of International Financial
Report Standards. Finally, future studies may want to share this experience by
extrapolating some of the data as well as the statistical inferences that this
study has come up with.
1.7 Scope of the study
The Nigerian economy is a large component with a lot of diverse and
sometimes complex parts. In this regard the study looks at a particular part of
the economy by focusing particularly on the financial sector. Even then, the
study does not cover all the parts of the financial sector, but focuses only on the
capital market and its activities as such its impact on Nigerian economic
growth. This is informed by the importance of the capital market to the
economic development of the country because it provides long term funds
needed for investment for the growth of the economy.
10

The choice of the period of study, 1983-2010 is predicted on the reasoning that,
the market has experienced remarkable developmental changes as well as
improvement in the policy framework of the market. This is in terms of its
operational activities, increase in the number of quoted companies and
securities, as well as market capitalization. Although, new issues and volume of
transactions have all recorded significant increase during the period of study but
there have been records of downturn in some years as a result of the global
financial crisis.

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