1

IMPACT OF CAPITAL MARKET ON ECONOMIC

GROWTH IN NIGERIA 1990 - 2012

Digitally Signed by: Content manager’s Name DN : CN = Webmaster’s name O = University of Nigeria, Nsukka OU = Innovation Centre

Ugboaku, Edith J.

EGWU MAUREEN IHEAKACHI

PG/M.Sc/08/47419

FACULTY OF BUSINESS ADMINISTRATION

DEPARTMENT OF DEPARTMENT OF DEPARTMENT OF DEPARTMENT OF BANKINNG AND FINANCEBANKINNG AND FINANCEBANKINNG AND FINANCEBANKINNG AND FINANCE

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IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH

IN NIGERIA 1990 - 2012

BY

EGWU MAUREEN IHEAKACHI

REG. NO: PG/M.Sc/08/47419

DEPARTMENT OF BANKING AND FINANCE,

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA

ENUGU CAMPUS

DECEMBER, 2014

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TITLE PAGE

IMPACT OF CAPITAL MARKET ON ECONOMIC GROWTH

IN NIGERIA 1990 - 2012

BEING A DISSERTATION PRESENTED TO THE

DEPARTMENT OF BANKING AND FINANCE,

FACULTY OF BUSINESS ADMINISTRATION

UNIVERSITY OF NIGERIA

ENUGU CAMPUS

BY

EGWU MAUREEN IHEAKACHI

REG. NO: PG/M.Sc/08/47419

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR

THE AWARD OF MASTERS OF SCIENCE (M.Sc) DEGREE

IN BANKING AND FINANCE.

SUPERVISOR: ASSOC. PROF. E. CHUKE NWUDE

DECEMBER, 2014

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APPROVAL PAGE

This research work has been read and approved as having satisfied one of the

conditions for the award of Master of Science (M.Sc), Department of Banking

and Finance, University of Nigeria, Nsukka, Enugu Campus.

…………………………………..…….. ….. ……. ………….

ASSOC. PROF. E. CHUKE NWUDE DATE

(Supervisor) ……………………….. …………………….. ASSOC. PROF. C. E. NWUDE DATE (Head of Department)

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DECLARATION

This dissertation written by Egwu Maureen Iheakachi with Registration No.

PG/M.Sc/08/47419 presented to the Department of Banking and Finance,

University of Nigeria, Enugu Campus has not been submitted for the award of

any degree or diploma either in this or any other tertiary institution.

…………………………………….. ……………………….

EGWU MAUREEN IHEAKACHI DATE (Student)

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DEDICATION

I dedicate this work to Almighty God.

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ACKNOWLEGEMENT

I sincerely express my deepest gratitude to my supervisor, Prof C.U. Uche, for his

fatherly role in the course of this work. My immense gratitude goes to my H.O.D; Dr J.U.J

Onwumere for his academic advice and corrections especially in my research methodology.

I appreciate the support of my lecturers especially Dr Ujunwa, who also help in

supervising the work. My thanks also go to my friends, relations and well wishers.

Special thanks goes to My parents, brothers; Mr & Mrs Francis Egwu, Mr & Mrs

Emmanuel Oko Egwu, Mr Mark Egwu and my sister; Priscilla Egwu for their support and

encouragement throughout the duration of this work.

I cannot forget the kind gesture towards me by Mr & Mrs Michael Inya and Miss

Faith Ogbonna for their support.

Finally, may I thank Remigius Odo and Udochukwu Nwachukwu for their advice and

encouragement in the course of this work.

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ABSTRACT

This study appraised the impact of capital market on economic growth in Nigeria from 1990 to 2012. In the course of the study, it examined the effect of capital Market in the significant change of investment level in Nigeria and ascertained the movement of transaction at the Nigerian Capital Market within the period under study. Regression analysis was employed in the work. In the model, Real Gross Domestic Product Per Capita (dependent variable) and the explanatory variables; Total New Issues Ratio (TNIR), Market Capitalization Ratio (MCAPR) and Value of Transaction at the Nigerian Stock Exchange Ratio (TNSR) were used in the first model while Gross Capital formation Ratio (dependent) and the same explanatory variables were specified in the second model. The result reveals that the regression plane is statistically significant. It was found that capital market has significant impact on the Nigerian economic growth within the period under study. More so, capital Market has not caused any significant change in the investment growth in Nigeria and there are fluctuations in the upward movement of the transaction at the Nigerian Capital Market. It was recommended that the capital market should provide a meaningful orientation about the operations and mechanisms of the market to the interested public. The government through its appropriate agencies should encourage the development and participation in the market by a meaningful media campaign (radio and television). Disclosure of financial positions of the listed companies should be published regularly in newspapers.

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TABLE OF CONTENTS

Title page………………………………………………………………………….. i

Approval page ……………………………………………………………………. ii

Declaration ………………………………………………………………………. iii

Dedication ……………………………………………………………………….. iv

Acknowledgement………………………………………………………………… v

Abstract ………………………………………………………………………… vi

Table of Content………………………………………………………………….. vii

List of Tables ……………………………………………………………………. ix

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study…………………………………….……………..… 1

1.2 Statement of the Problem……………………………………………............. 4

1.3 Objective of the Study ………………………………………………………. 6

1.4 Research Questions…………………………………….…………………….. 6

1.5 Hypothesis of the Study………………………………..…………………….. 7

1.6 Scope of the Study…………………………………………………………… 7

1.7 Significant of the Study………………………………...…………………….. 7

References

CHAPTER TWO: REVIEW OF RELATED LITERATURE

2.0 REVIEW OF RELATED LITERATURE

2.1 Theoretical Literature……………………………………………………… 11

2.1.2 Origin of the Capital Market……………………………………………… 11

2.1.3 The Component of Capital Market……………………………………....... 13

2.1.4 Capital Market Operators ………………………………………………… 16

2.1.5 The Nature of the Capital Market in Nigeria……………………………… 20

2.1.6 The Nigerian Stock Exchange…………………………………………….. 21

2.1.7 Central Bank of Nigeria…………………………………………………… 28

2.1.8 Securities and Exchange Commission…………………………………….. 28

2.1.9 Economic Contribution of the Nigerian Capital Market………………….. 31

2.1.10 The Role of the Capital Market in the Transfer of Funds………………… 31

2.1.11 The NSE and Capital Formation………………………………………….. 32

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2.1.12 Major Reforms in Nigerian Capital Market……………………………… 35

2.1.13 Global Capital Market Integration and Economic Growth……………… 39

2.1.14 Problems of the Nigerian Capital Market………………………………... 42

2.2 Empirical Works on Capital Market and Economic Growth …………….. 43

2.3 Differences between the researcher’s view and previously reviewed literature.. 47

Reference

CHAPTER THREE

3.0 RESEARCH METHODOLOGY

3.1 Research Design…………………………………………………………. 53

3.2 Nature and Sources of Data…………………………………………………53

3.3 Description of Research Variables…………………………………………..54

3.4 Techniques of Analysis……………………………………………………...56

3.5 Model Specification…………………………………………………........ 57

Reference

CHAPTER FOUR

4.0 PRESENTATION AND ANALYSIS OF RESULT

4.1 Presentation of Data……………………………………………………... 62

4.2 Presentation of Result …………………………………………………… 74

4.3 Test of Hypothesis……………………………………………………...... 78

4.4 Implication of Result……………………………………………………… 80

Reference

CHAPTER FIVE

5.0 SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary of findings……………………………………………………... 82

5.2 Conclusion………………………………………………………………… 84

5.3 Recommendation………………………………………………………… 85

5.4 Recommended Areas for Further Research ……………………………… 86

5.5 Contribution to Knowledge ………………………………………………. 87

Bibliography

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LIST OF TABLES

Table 4.1.1: Total New Issues (TNI), Market Capitalization (MCAP) and value of

Transaction at the Nigerian Stock Exchange (TNS) for (1990-2012) ………62

Table 4.2.1: Determination of Real Gross Domestic Product per capital ………………..57

Table 4.2.2: Determination of Market Capitalization, Total New Issues and value of

transaction at the Nigeria Capital Market Ratios for (1990 -2012) ………….69

Table 4.2.5: Determination of ratio of Gross fixed Capital Formation from 1990-2012. ...73

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CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The capital market has been identified as an institution that contributes to the

economic growth and development of emerging economies like Nigeria (Osaze, 2000). This

is made possible through some of the roles played such as channelling resources, promoting

reforms to modernize the financial sectors, financial intermediation capacity to link deficit to

the surplus sector of the economy, and a veritable tool in the mobilization and allocation of

savings among competitive uses which are critical to the growth and efficiency of the

economy (Alile, 1984).

Capital market is made up of financial institutions which deal in long- term loans for

investment. They therefore bring long-term lenders and borrowers together. Loans given are

usually for more than two years. Institutions that operate in this market include; insurance

companies, issuing Houses, Development Banks, Investment Banks, Investment Trusts,

Building Societies or Mortgage Banks, Finance Corporations, Savings Banks and Stock

Exchange. Financial instruments used in the capital market to finance long-term investments

are stocks and shares, company bonds and government bonds.

The capital market can be divided into the primary and the secondary market. The

primary market deals with the buying and selling of new securities. The secondary market is

the market that deals with the buying and selling of already existing (secondhand) securities.

It is dominated by the Stock Exchange.

In the narrowest sense, the capital market involves the problems and prospect of

equity investment. This involves the issue and market of shares, bonds and debentures using

the services of brokers, dealers and underwriters.

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It helps to channel capital or long-term resources to firms with relatively high and

increasing productivity thus enhancing economic expansion and growth (Alile, 1997).

Ekundayo, (2002) argues that a nation requires a lot of local and foreign investments to attain

sustainable economic growth and development. The capital market provides a means through

which this is made possible. However, the paucity of long-term capital has posed the greatest

predicament to economic development in most African countries including Nigeria.

Osaze, (2000) sees the capital market as the driver of any economy to growth and

development because it is essential for the long-term growth capital formation. It is crucial in

the mobilization of savings and channelling of such savings to profitable self-liquidating

investment.

The Nigerian capital market provides the necessary lubricant that keeps turning the

wheel of the economy. It does not only provide the funds required for investment but also

efficiently allocate these funds to projects of best returns to fund owners. This allocative

function is critical in determining the overall growth of the economy. The functioning of the

capital market affects liquidity, acquisition of information about firms, risk diversification,

savings mobilization and corporate control (Anyanwu, 1998). Therefore, by altering the

quality of these services, the functioning of capital markets can alter the rate of economic

growth (Equakun, 2005).

Geert (1997), posits that the cheap source of funds from the capital market remain a

critical element in the sustainable development of the economy. He enumerated the

advantages of capital market financing to include no short repayment period as funds are held

for medium and long term period or in perpetuity, funds testate and local government without

pressures and ample time to repay loans.

Capital market development has an important role to play in economic development.

Jyoti Koirala (2009), argue that capital market development is an important wheel for

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economic growth as there is a long-run relationship between capital market development and

economic growth. Capital market development has the direct impact in corporate finance and

economic development.

Jyoti Koirala (2009) states that capital 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) in Jyoti Koirala

(2009) 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.

In the works of Tadesse, (2002), the issue concerned with finance and growth can be

loosely grouped into four groups. A first group takes financial activity and economic growth

as causally unrelated phenomena. In this view, the observable correlation between them is

spurious. Economies grew, and so did their financial sectors, but the two followed, and

continue to follow, their own logic. A second group of economists takes financial activity as

the result of “real” economic activity. As the growing scale of economic activities requires

more and more capital, institutional raising and pooling of funds are substituted for individual

fortunes and retained profits. On the other hand, a third – and now certainly the most

prominent – strand of the issue identifies financial activity as a determinant of economic

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growth. Finally, a fourth group of economists would see financial activity – at least

occasionally – as harmful to real economic activity.

According to Kindleberger (1993), the possibility of a causal relationship between

financial development and economic growth has for a long time attracted the attention of

researchers and policy makers. Generally, economic theory postulates three distinguishable,

but not mutually exclusive, and partly unintended, effects of financial activity and

development on overall economic performance:

• The provision of an inexpensive and reliable means of payment (coins, later banking

money), which historically came as a by-product of fractional reserve banking,

• Secondly, a volume effect, where financial activity increases savings and thereby

resources that can be channelled into investment, and

• Thirdly, an allocation effect, according to which financial development improves the

allocation of resources devoted to investment.

Efforts have been made to study the relationship between capital markets and

economic growth by some researchers but much related effort has not been made on the

impact of capital market on the domestic investment in Nigeria. Hence, the researcher

appraises the capital markets’ impact on the economic growth vis-à-vis investment level.

1.2 Statement of the Problem

Nigerian Capital Market has been faced with challenges. For instance, in the capital

market, there has been a decline in the value of shares resulting from the global financial and

economic crisis. This has equally reduced the propensity to invest in the sector thereby,

affecting the economic growth of Nigeria. The poor functioning capital markets deter foreign

investors because the markets are illiquid and trading is expensive (Geert, 1997). Nigeria’s

foreign portfolio investment is adversely affected by high stock prices. As foreign portfolio

investment is the entry of funds into a country where foreigners make purchases in the

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country’s stock and bond markets, sometimes for speculation, it is usually a short term

investment (sometimes less than a year, or with involvement in the management of the

company), as opposed to the longer term Foreign Direct Investment partnership (possibly

through joint venture), involving transfer of technology and "know-how". The need to attract

foreign capital in non debt creating forms is only one reason, and not the most important

reason, why Nigeria should wish to foster their emerging equity markets.

The Nigerian capital market was to play a key role during the offer for sale of the

shares of the affected enterprises like Nigerian Produce Marketing Company (NPMC)

(Anyanwu 1993; Anyanwu et al. 1997; Oyefusi and Mogbolu, 2003). The haphazard pricing

of capital in the economy has confused and continue to baffle even the most sophisticated

investors in Nigeria’s capital market. The idea that capital can best be invested in shares of

financial institutions rather than in the real sector of the economy, made many analysts to

wonder where the true foundation of the economy lies. Many banks extended margin loans

and over leveraged their assets by diverting liquidity from long-term investments that would

have been more meaningful for the real sector of the economy to artificially inflated stock

prices. Investors in Nigeria’s capital market have not had real alternatives in asset allocation

due to lack of investment products in the equity market on the one hand and sloppy CBN’s

monetary policy rates for short-term money market rates and fixed income securities on the

other hand. The CBN’s interest rate policy has had impact on the direction of capital

movement. The wide discrepancies in interest rates ranging from the Treasury bills to

Treasury notes/ bonds auctions, to monetary policy targets, to inter-bank lending offer rates,

to prime rates, to consumer lending rates, etc… have made any rational expectations a luxury

consideration for serious investors.

With foreign investors controlling larger shares of investments in the market, the

moment they pull their investments the market returns to near crash. Any time there is

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expectation of policy decision from the Federal Government, these foreign investors remain

at stand-still – not buying and not selling. No gainsaying, whenever investors with high share

holdings off-load; the market crashes, but whenever they keep mute in terms of buying and

selling, there is stillness in the market. This results in most of the stocks not changing in price

movements. Hence there is need to examine capital market and economic growth in Nigeria.

1.3 Objectives of the Study

The general objective of this work is to appraise the Nigerian capital market

and its implication on the economic growth. The specific objectives are as follows;

i. To appraise the impact of capital market on the economic growth.

ii. To examine the effect of capital Market in contributing to investment growth in

Nigeria.

iii. To ascertain the movement of transaction at the Nigerian Capital Market

within the period 1990-2012.

1.4 Research Questions

Based on the stated problems above, there is need to answer the following

questions in the course of this research work.

i. Does capital market have significant impact on Nigerian economic growth?

ii. Has capital market caused any significant difference on the domestic

investment in Nigeria?

iii. What is the trend of transaction in market capitalization and total new issues?

1.5 Hypothesis of the Study

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A hypothesis is a prediction or a conjecture stated well in advance of

observance (or actual collection of data) about what can be expected to occur under

stated or given conditions, (Asika, 1990).

Hypothesis 1

Capital market does not have significant impact on the Nigerian economic growth

Hypothesis 2

Capital Market has not caused any significant change on the investment level in

Nigeria.

1.6 Scope of the Study

The study covers the appraisal of capital market and its Implications on the Economic

growth in Nigeria. In the course of the analysis, effort shall be made to evaluate the impact of

capital market on the Nigerian economic growth. The research analysis shall cover the

period from 1990-2012. The justification of the periods under study is based on the

researcher’s preference.

1.7 Significance of the Study

This research empirically appraises the capital market and its implication on the

Economic growth of Nigeria. It will be of great significance to investors, government and

academia in the following ways;

1. To the investor’s, the study is timely especially now that share ownership is gaining

increasing popularity by the day in Nigeria. Also, investors will be acquainted with

the activities regarding the operations by their stock brokers.

2. To the government, the study will provide recommended policies that will assist the

concerned agencies (Security and Exchange Commission, Nigerian Stock Exchange)

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in formulating policies towards improving performance, efficiency and development

of the market.

3. To the academia, this study will contribute to Knowledge and literature to be referred

to by researchers. It will also throw more light on empirical evidence on the growth of

the economy. In addition, it will possibly spur other research work aimed either

sustaining or debunking its evidence.

References

Alile, HI (1984), The Nigerian Stock Exchange: Historical Perspectives, Operations

and Contributions to Economic Development, Central Bank of Nigeria Bullion

2: 165-69.

Alile, HI (1997), Government must divest. The Business Concord December 2.P,8.

Anyanwu, JC (1993), Monetary Economics Theory, Policy and Institution, Onitsha:

Hybrid Publishers Ltd, pp. 247-274.

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Anyanwu, JC (1998), Stock Market Development and Nigerian Economic Growth, Nigerian Financial Review 7(2): 6 – 13.

Anyanwu, JC. Onyefusi, SA, (1997), Structure of the Nigerian Economy (1960-1997).

Onitsha JOANEE Educational Publishers Ltd. P. 453. Asika, N (2001), Research Methodology in Behavioural Science: Longman

Publishers, Ikeja Lagos. Central Bank of Nigerian (CBN), Statistical Bulletins of 2005, 2006 and 2008, Abuja

Central Bank of Nigeria Publications.

Ekundaya, IK (2002), Creating a conducive Environment for invest in the Nigerian

Capital Market. Paper presented at Public Enlightenment on opportunities in

the Capital Market for industrial Development of Kogi State, Lokoja 29th

March to 1st April, 2002.

Geert, B. (1997), Capital Market: An Engine for Economic Growth, Stanford

University, Stanford CA, 94305. Jyoti, K. (2009), "Stock Market Development and Economic Growth: Evidence from Underdeveloped Nation"; A proposal Writing, Nepal.

Kindleberger, C. P. (1993), A Financial History of Western Europe. 2nd ed., New York: Oxford

University Press.

Okereke, N (2000), Stock Market Financing Options for Public Projects in Nigeria.

The Nigerian Stock Exchange Fact Book. Pp. 41-49

Osaze, BE (2000), The Nigeria Capital Market in the African and Global Financial

System. Benin City. Bofic Consults Group Limited. Oyefusi, SA. Mogbolu RO (2003), Nigeria and the structural Adjustment Programe.

In MA Iyoha, Co Itsede, (Eds) Nigerian Economy Structure, Growth and

Development, Benin City. Mindex Publishing pp. 387 – 402.

Tadesse, S. (2002), “Financial Architecture and Economic Performance: International Evidence.” Journal of Financial Intermediation 11: 429–454.

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CHAPTER TWO

REVIEW OF RELATED LITERATURE

This Chapter presents a review of various literature and empirical studies on

implication of economic growth. This will help to set the problem in a theoretical and

highlight the soundness and relevance of previous studies of this study.

2.1 Theoretical Review

According to Okereke (2000:2) a capital market has been defined as “the section of

the financial system that is responsible for efficiency channeling of funds from the surplus to

deficit economic limits on a long-term basis. The capital market as an institution is rather a

network of specialized financial institution that in various ways bring together suppliers and

users of fund. These institutions include Merchant Banks, Stock Broking Firms, Issuing

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House, Venture Capital Companies, Unit Trust Scheme, the Central Bank, the Securities and

Exchange Commission and Stock Exchange which is the hallmark of the Capital Market.

2.1.2 Origin of the Capital Market

According to Dada (2003), the Capital Market in Nigeria was established on 15th

September 1960 as the Lagos Stock Exchange with the Objective of providing Facilities for

trading securities. The Stock Exchange Commenced on July 5th, 1961 with thirteen securities.

Some major events occurred in 1962, which had salutary effect on the development of the

infant market. These include their call of Nigerian Investment, from London by Nigerian

Produce Marketing Company (NPMC), the promulgation of the Exchange Control Act 1962

and the establishment of Capital Issue Commitment (CIC) under the auspices of central Bank

of Nigeria. The CIC operated like an ad hoc consultative body to ensure the orderly

development of the market by regulating share prices and timing of public issues of

securities.

Between 1967 and 1971, Government remained a dominant key player especially in

the new issues market by regular floating development loan stock as a way of stimulating the

market. As at the end of 1971, Government floated 39 securities compared to 13 Equities and

8 industrial Loan Stocks. The Nigerian Enterprises Promotion Act (NEPA) was enacted in

1972, which obliged specified alien enterprises to indigenize part of their ownership, made a

remarkable positive impact on the development of the market. Within three years of its

enactment, 20 new companies were listed on the Exchange. Following the report of the panel

set up in 1975 to review the 1972 indigenization exercise, the second Act was enacted in

1977 to correct the “failure” of the first exercise.

On April 15th, 1976, the Okigbo Committee was set up to undertake a comprehensive

review of the Nigerian Financial System. The committee made a number of

recommendations, many of which were wholly or partially accepted. Among which were,

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establishment of Securities and Exchange Commission (SEC) to replace the Capital Issues

Commission (CIC). The Securities and Exchange Commission was enacted in 1979 making it

the Apex regulatory Institution of Capital market. The SEC’s functions include, approval and

regulation of mergers and acquisition and other forms of business combination and fixing of

securities prices.

Government equally established the Nigerian Stock Exchange with trading floors in

Lagos, Kaduna and Port Harcourt also added additional three trading floors in the 1980’s

including Kano, Ibadan and Onitsha. Other relevant enactments that support and regulate the

operations of the market are discussed below. Some of the Acts as expanciated in ICAN

(2006) include the following:

1. Government and Other Securities (Local Trustees and Powers) Act 1957.

This ordinance is intended to facilitate the investment of trust and other funds in

Nigerian locally issued securities and for the process connected there within.

2. The Lagos Stock Exchange Act of 1961

This Act restricted the business of dealing in Stocks and Shares to member of Lagos

Stock Exchange with branches in Lagos, Kaduna and Port Harcourt alone.

3. The Income Tax Management Act of 1961

The fourth schedule deals with retirement benefit schemes which provides that

contribution or pension funds must invest a minimum of between 331/3% - 50% of all

monies in securities under the authority of any government.

4. The Trustee Investment Act of 1962

This act prescribes the legal frame work of investment portfolios for public and trust

funds in the absence of specific trust deeds and rules.

2.1.3 The Components of the Capital Market

The Capital Market is sub-divided into two

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- Primary Market

- Secondary Market

2.1.3.1 Primary Market

Primary Market is a market where fresh funds are sourced, that is, new or additional

shares, Debentures bonds etc. are sold. It is otherwise known as the new issue market.

Primary market is a very vital sector in the Nigerian Economic System. Idle savings i.e.,

savings held for speculative motives are mobilized in the primary market through the

issuances of securities such as shares, debentures, and bonds channeled to productive sectors.

It is the segment of the capital market where fresh fund and additional capital are sourced by

companies and State/Local Government.

The primary market is used by government and corporate bodies to raise funds to

invest in capital projects or other infrastructural development. The corporate bodies raise

funds from the market in two ways – public offering and private offering.

2.1.3.2 Secondary Market

The secondary market is the market in which existing securities are traded. It is a

resale market where securities originally bought from the primary market are resold and

bought. People are generally more familiar with the secondary market than the primary

market for an obvious reason – at least they can see the market i.e. the House bearing “Stock

Exchange House” where trading goes on everyday.

The secondary market is an important segment of the capital market because it

provides an avenue for investors to convert their securities to cash and allow those wishing to

buy additional existing securities to do so. With the existence of a secondary market,

investors are encouraged to participate freely in the primary market knowing that they can

easily dispose or sell off their securities as the need arises.

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Therefore, the success of the primary market to some extent is depended on the

effectiveness of the Secondary market.

The secondary market can also be sub-divided into two:

- The organized market

- The unorganized market

2.1.3.3 Organized Market

The organized market is symbolized by a Stock Exchange which may be a physical

trading place where stock brokers meet on a daily basis to buy and sell existing securities,

which have already been bought from the primary market. However, an Exchange may be

represented by the facilities, traders use to get in touch with each other to buy and sell

securities. These facilities could be phone, computer and all the electronic devices of the jet

age.

The market is organized because both the stock brokers who trade on the floor of the

exchange and the methods of trading are subjected to stringent rules and regulations that must

be obeyed and respected. There is also total disclosure of all relevant information pertaining

to any securities to be bought or sold in the market.

2.1.3.4 Unorganized Market

The unorganized market is a market where unquoted securities are bought and sold.

The Over-The-Counter (OTC) market is an example of an unorganized market. An

unorganized market may not have an identifiable trading floor but trades with the use of

telephones and computers. Securities traded here are not listed or quoted in any Stock

Exchange. OTCs are usually strategically localized to serve some segments of local

communities.

2.1.3.5 Methods of Trading In the Secondary Market

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- The call Over System: Stock brokers gather on the floor of the Stock Exchange at a

given period to trade on the listed securities. The listed securities are then read out

aloud, one after the other by a presiding official of the Stock Exchange called the call

over chairman. As each security is being read out, the stock brokers who had orders to

buy or sell indicate interest at the price at which they were willing to strike a deal.

There after, bargain slips will be exchanged after the transaction had been

authenticated by the Stock Exchange. The underlying documents would be lodged

with the Registrar to enable him prepare and issue certificate in the names of the new

owners of the securities and delete the names of old owners, who had sold their

securities from the register.

- The Auction Market:

This market does not exist in Nigeria, but in the more developed markets such as UK,

USA, Japan etc.

- The Automated Screen-Based Training System

ATS is a process which allows trading to be done electronically such that

orders to buy and sell are traded electronically. Nigerian Capital Market is presently

operating an Automated Trading System (ATS).

2.1.4 Capital Market Operators

The capital market is complicated in its operation and makes little or no meaning to

the uninitiated. It is important therefore that people understand the language, operations and

the environment to be successful in the operation.

Capital market operators are mainly corporate bodies duly incorporated under the

Companies and Allied Matters Act (CAMA) 1990, as limited liability companies (private or

public limited companies plc) under section 29(1) of the Investment and Securities Act No.

27

45 of 1999 and Rule 28 of the Rules and Regulation made there under, Capital Market

operators are subject to registration with the SEC.

They act as intermediaries or the middlemen between the issuer (users of fund) and

the investors. They are:

Brokers/Dealers

Issuing House

Investment Advisers

Portfolio Managers

Registrars

Trustees

BROKER/DEALERS OR STOCK BROKERS

Stock brokers are institutions that act as intermediaries in both the primary and

secondary markets, though they are more active in the later than the former.

The functions of Stock Brokers are two folds:

• BROKERS: They can be linked to lawyers in their role as agents of their clients.

Where lawyers represent their clients in a court of law, stock brokers represent their

clients (investors) on the floor of the Exchange. Brokers receive money from clients

to buy securities on their behalf on the Exchange trading floor and also sell off the

securities as requested by them. Brokers receive commission called “brokerage” for

their services which is based on the volume of transaction.

• DEALERS: Stock brokers buy for their own account and maintain inventories of

securities. They also sell off the ware housed securities at a price higher than they had

purchased them, thereby making some profits.

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ISSUING HOUSES

Issuing houses are financial institutions that specialize in helping corporate bodies

(issuers) or government to raise funds from the primary segment of the capital market.

Issuing Houses are agents of issuers and they perform four major functions:

• Financial Advisory Services: it is their responsibility to advise the issuer on the

desirability or appropriateness of raising additional capital, the structure terms and

conditions of the proposed financing, and the right time to go to the market.

• Fund Raising: once the issuer buy the idea of raising additional long-term capital

from the market, the issuing house assists the company to assemble and coordinate the

other parties to the issue that would contribute to the success of the issue.

• Underwriting: it is an insurance against the possibility of an issue failing. When an

issuing House underwrites an issue, he is in essence guaranteeing the company that

his outfit would put down the money at the close of the issue. If the public fails to

pick up the shares. There are three types of underwriting, firm commitment, stand by

and best effort.

• At times giving/negotiating bridging loans for issuers.

INVESTMENT ADVISERS

These are institutions or individuals who earn their living by giving sound investment

advice. Their function is limited to the giving of advice as to what kind of stock an investor

could put his money in. they can provide information base on the happenings in the market,

which could come in the form of publications, newsletters, etc, but they are not allowed to

collect money from clients to purchase securities, other noise they would be performing the

function of a fund manager.

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PORTFOLIO MANAGERS

Portfolio/fund managers are institutions that receive funds from their clients to buy

and manage their securities portfolios. A portfolio is a collection of different securities by one

person or company.

In the management of a portfolio, the investor allows the manager a free hand to

select the type of share that, in his judgment are suitable for the portfolio and his clients’

objectives. If his clients’ objectives are capital appreciation or regular income or even to

provide for his retirement, the portfolio manager must carefully select those securities that

would meet these given objectives.

The manager sends periodic (monthly etc) statements to the clients. In carrying out the job of

a portfolio/fund management, the interest of the client must be paramount to the

management; the interest of the client must be paramount to the manager. Portfolio/fund

managers are required to file quarterly reports with the SEC.

REGISTRARS

A registrars is a company that keeps a comprehensive register or record all of all the

share holders of a company after the close of a public offer and thereafter. The registrar

arranges for all statutory meetings of shareholders e.g. the Annual General Meeting (AGM)

Extra Ordinary General meeting (EGM) etc. he is responsible for the distribution of share

certificates, annual reports, dividend warrants, and notice of meetings to shareholders, etc.

TRUSTEE

The trustee is a person or an institution that holds asset on behalf of others called

beneficiaries. In the context of the capital market where a company issues a debt instrument

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(debenture) and a trust deed, a trustee is usually appointed to represent the interest of the

creditors e.g. debenture holders. It is the trustee that will keep the title documents of any

collateral or property mortgaged to the creditors or certificate of investments in the case of a

unit trust and generally ensures compliance with the provision of the trust deed.

INVESTORS

Investors are the institutions and individuals who buy securities from the capital

market. In the primary market, government and corporate bodies are the major suppliers of

securities while the institutional investors like insurance companies are the major buyers.

2.1.5 The Nature of the Capital Market in Nigeria

The capital market is one of the dominant arms of the financial system. It actually

performs the function of intermediation whereby, savings of some members of the society are

harnessed and made available to other members of the society for productive investment.

The capital market is an administrative and commercial frame work of institutions

that arranges for financial assets. It is made up of several components shown below.

Capital Market

Market for Negotiated fund Long-term Securities Market

Market for Institutional Capital Fund

Informal Capital Market

New Issues Market

Stock Market

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The capital market is segmented in terms of negotiability. Hence, two distinct

segments could be identified. They include market for negotiated capital fund and long-term

securities market.

Negotiated capital fund is a characteristic of all transaction in capital fund. This

consists of borrowing done between individuals in the formal market. Such institutions are

banks, pension or provident fund that gives medium and long term loans. On the other hand,

there exists the long term, securities market where financial assets are bought and sold.

Financial assets could be fixed (bonds, preference share, equity stock, some preferred stock

income securities).

2.1.6.1 The Nigerian Stock Exchange

The NSE was registered as Lagos Stock Exchange on 1st March 1959, incorporated on

15th September 1960, commenced business on 5th June 1961 and 2nd December 1977. It was

transformed into Nigerian Stock Exchange.

According to Atile and Anan (1986), a stock Exchange is a place where individuals

and investors can make or lose money easily. Stock Exchange presents an ideal setting for

smart and daring speculator to make a fortune with relatively little effort.

NSE is both a primary and secondary market. It is a primary market because

companies and institutions quoted on the stock market can raise funds by issuing new shares

or loan stock. It is also a secondary market for the buying and selling of existing securities.

Debt and equity securities are traded on the Exchange. Debt instruments are financial claims

with an obligation on the issuer to pay interest at stated interval and to redeem the issue at a

32

future date. Debt Instruments include Federal Government of Nigeria development stocks,

Industrial loans, preference stocks and bonds. Equity capital refers to the capital of the

owners of the firm, i.e. ordinary shares, (Nwude, 2003).

FUNCTIONS OF NIGERIAN STOCK EXCHANGE

1. To increase the liquidity of listed securities by creating a permanent markets for

exchange of such securities at a little cost.

2. To provide an opportunity for a continuous assessment of the values of listed

securities and hence the worth of their issues.

3. Quotation of a security on the stock exchange increases the stature of securities. The

enhanced image and added liquidity to listed securities tend to increase their

acceptability as collateral for loans.

4. By asking quoted companies to submit detailed and periodic information, the Stock

Exchange increases the volume of corporate information available to the public.

MEMBERSHIP OF NIGERIAN STOCK EXCHANGE

Application for membership is open to firms, institutions and individuals. Two types

of membership exist, the ordinary members and dealing members. One must first register as

an ordinary member before applying for selection as a dealing member.

On paying the required deposit, a dealing member is issued a license to deal. Ordinary

member is the one who has acquired qualifying shares of the issued share capital in

accordance with the NSE articles and has been admitted into the register of members.

A dealing member is a stock broker who in addition to being an ordinary member is

licensed to buy and sell securities on the trading floor of the exchange on behalf of the

investing public.

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CHARACTERISTICS OF THE NIGERIAN STOCK MARKET

Stock market development can be categorized using three main characteristics:

traditional, institutional and asset pricing (Demirgüç-Kunt and Levine 1996). Traditional

characteristics are concerned with basic growth measures of stock market. These measures

include number of listed companies and market capitalization. There are also the Institutional

characteristics measures. These Institutional characteristics measures are the regulatory and

legal role that may influence functioning of the market, information disclosure and

transparency requirements as well as market barriers and trading costs. Lastly, the Asset

Pricing characteristics measures focus on the efficiency of the market especially in relation to

the pricing of risk.

ϖ Traditional Characteristics

a) Market Size

With 269 securities listed and a market capitalization of approximately N300 billion

or US$3,000 million, relatively to international standards, the Nigerian Stock Exchange can

still be regarded as small. In Africa, Nigeria ranked 4th after South Africa, Egypt and

Morocco in term of market size (Standard and Poor’s Emerging Stock Markets Fact book,

2000). Among the emerging markets, Nigeria’s share of emerging market capitalization out

of 54 markets covered by Standard and Poor’s was just 0.1% as at the end of 1999 (Standard

and Poor’s Emerging Stock Markets Factbook, 2000).

Alile and Anao, (1986) adduced possible reasons for the small size. One of the

reasons is that indigenous entrepreneurs were not too keen in to going public due to fear of

losing control. However, an innovative move by the stock market through the creation of

second–tier securities market (SSM) tried to find solution to the problem. Measures taken by

the governments and the exchange itself are expected to boost the resource base of the stock

market in Nigeria. These measures are: Privatization of Public Enterprises, linking up of the

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exchange with Reuters Electronic Contributors System for on line global dissemination of

stock information, launching of the exchange’s Intranets System (CAPNET) and the

transition of the exchange from manual call-over Trading System to Automated System

(ATS) in April 1999. It is also expected that the present democratic dispensation will impact

positively on the turnover of the exchange.

b) Liquidity

Basically, liquidity refers to the ease with which an asset (in these case securities) can

be turned into cash through an efficient market. That is, the ability to easily buy and sell

securities. Demirgüç-Kunt and Levine (1996) identified two main reasons why liquidity is

important in the characterization of stock market. The first is that liquidity relates to the

riskiness of the investment. An investment is deemed to be less risky where investors are able

to alter their portfolios quickly and cheaply. While the second, theoretically, allocation of

capital is more efficient and as such liquid market enhances long-term economic growth.

Added to the points above (Osinubi 1998) pointed out that liquidity of the stock market

facilitates profitable interaction between the stock market and the money market in that

shares become easily acceptable as collateral for bank lending thereby boosting credit and

investment.

There are two main measures of liquidity; total value traded ratio and turnover ratio.

a) Total value traded ratio is the total value of shares traded on the Stock market

exchange divided by GDP. It measures trading of equities as a share of national output.

Normally, it should positively reflect liquidity on an economy wide basis. The market has an

average of 0.25 per annum for the study period.

b) Turnover ratio is the value of total shares divided by capitalization. High turnover

reflects low transaction costs. The Nigerian stock market turnover ratio for the period under

study has an average of 0.04.

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ϖ Institutional Characteristics

a) Regulatory Institutions

Regulation is seen as a way of buoying investor’s confidence in brokers and other

capital intermediaries and stakeholders. It ensures fair play and transparency in the market

operations. This in turn encourages investment and trading in the stock market. Nigerian

capital market had from the onset ensured that a strong institutional framework was in place

through the establishment of Capital Issue Commission (though with no legal status), which

later metamorphosed, to Nigeria Securities and Exchange Commission in 1979 and serves as

the apex regulatory body of Nigerian capital market. Of added importance is that the Nigerian

Stock Exchange itself is a self-regulatory institution (Akamiokhor, 1984; Inanga and

Emenuga, 1997).

b) Transaction Costs

One of the relative measures of the efficiency of a stock market is the level of

transaction cost. The higher the transaction cost the highly inefficient the market is perceived

to be. Transaction cost can either be viewed from the perspective of an investor or that of the

companies. From a company’s point of view, it includes all expenses incurred in the bid to

make public offer of equity or loan stock. For an investor on the hand, transaction cost

comprises all expenses incurred in the purchase of shares or loan stock. Identifiable

transaction cost in Nigerian capital market includes: application fee (0.5%), valuation fee

(0.75%), brokerage fee (1%) and vending fee (1%). Other cost item includes payment to

auditors, solicitors, advertising and administrative expenses (Inanga and Emenuga, 1997).

c) Openness and Market Barriers

Until 1972 when the Indigenization Decree was promulgated, there was no restriction

to foreign investors in the Nigerian capital market. The Decree also known as Nigerian

Investment Promotion Decree was amended in 1977 and it effectively restrict capital inflows

36

to a maximum of 40% equity holding in listed security among other stringent measures. The

Decree was again amended in 1989 during the privatization era. This time it was aimed at

encouraging domestic investment by foreigners. However, total deregulation of the capital

market was helped by the Nigerian Investment Promotion Commission Act of 1995, Foreign

Exchange (Miscellaneous Provisions) Act of 1995 and recently, the Investment and Securities

Act of 1999. Foreigners now participate in the Nigerian capital market both as operators and

investors. There is no limit any more to the percentage of foreign holding in any company

registered in Nigeria. As at 2000, foreign holdings on the Nigeria stock exchange is 3.96 on

the average (BGL Financial Monitor, 2001).

ϖ Asset Pricing Characteristics

This deals with the efficiency of the asset pricing process in the securities market. The

major yardstick for measuring efficiency in terms of market prices is the informational

content inherent in such prices. A market price is touted as reflecting a strongly efficient

market if it adequately and correctly reflects all available information (past, present and

future) and are at the disposal of all market participants simultaneously and instantaneously.

It is regarded as semi-strong where current stock prices reflect both the information contained

in the historical prices and all publicly available information. Where the current prices reflect

only the historical information with little predictive value, the market is regarded as weak

(Inanga and Emenuga, 1997).

2.1.6.2 Central Securities and Clearing System (CSCS) a Subsidiary of NSE

Central Securities Clearing System (CSCS) was established on 14th April 1997. It

services as a central depository for all shares certificates of quoted securities including new

issues. Since its introduction in 1997, it has reduced instances of fraud perpetuated by capital

market operators especially stock brokers. It also provides cleaning settlement and custodian

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services for local and foreign investments. CSCS brought the Nigerian Stock Market at par

with what is obtainable from other developed countries.

The CSCS have now enhanced the operation of stock transactions through the

Automated Trading System (ATS) which replaced the manual Call Over System of Trading

in 1999. The major strength of CSCS lies in its ability to centralize operations which were

been done at different location.

2.1.7 Central Bank of Nigeria (CBN)

Central Bank is a major player in the capital market. It is the Apex Regulatory

authority for both banking and non bank financial institutions. It regulates the economy

through monetary policy. The CBN Monetary Policy highlights credit ceiling to the economy,

sectoral allocation of credits especially to the preferred sectors of the economy.

CBN monetary policy guidelines aim to achieve the following

1. Reduction of excess liquidity in the financial system

2. The moderation of the rate of inflation

3. The reduction of pressure on the balance of payments

4. Building up of external reserves and stabilization of naira exchange rate.

5. Efficient allocation of scarce resources to the productive sectors of the Economy.

6. The encouragement of direct local production

7. Employment generation.

2.1.8 Securities And Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is the apex regulatory institution of

the Nigerian Capital Market. It is a statutory body supervised by the Federal Ministry of

Finance. The Commission has evolved over time. In 1979, the Securities and Exchange

38

Commission Act was enacted to provide a statutory backing for the establishment of the

securities and exchanged commission (SEC). SEC commenced Operation in 1980. The SEC

Act has been reviewed several times. The Current Act is known as the Investment and

Securities Act No. Act is known as the investment and Securities Act No. 29 of 2007 (ISA).

The ISA 2002 provides guidelines of the operation and regulation of the Nigerian Capital

Market. Section 13 of the ISA empowers the commission to:

- Regulate investment and securities businesses in Nigeria as defined in this Act.

- Register and regulate Securities Exchange, Capital Trade points, futures, options and

Derivatives Exchanges, Commodity Exchange and other recognized investment

Exchanges.

- Regulate all offers of Securities by Public companies and entities.

- Render assistance as may be deemed necessary to promoters and investors wishing to

establish securities Exchanges and Capital Trade points.

- Prepare adequate guidelines and organize training programmes and disseminate

information necessary for the establishment of securities Exchanges and Capital trade

points.

- Register and regulate corporate and individual capital market operators as defined in

this Act.

- Register and regulate the workings of venture capital fund and collective Investment

Schemes in what even form.

- Facilitate the establishment of a nationwide system order to protect investors and

maintain a fair and orderly market.

- Facilitate the linking of all markets in Securities with information and communication

technology facilities.

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- Act in public interest having regard to protection of investors and maintenance of fair

and orderly markets and to this end establish a nation-wide trust scheme to

compensate investors whose losses are not covered under the investors’ protection

fund administered by Securities Exchanges and capital Trade Points.

- Keep and maintain a register of foreign portfolio investment.

- Register and regulate securities depository companies, clearing and settlement

companies, custodians of assets and securities, credit rating agencies and such other

agencies and intermediaries.

- Protect the integrity of the securities market against all forms of abuses including

insider dealing.

- Promote and register self regulatory organizations including securities Exchanges,

capital Trade Points and Capital Market Trade Associations to which it may delegate

its powers.

- Review, approve and regulate mergers, acquisitions, take overs and all forms of

business combinations and affected transactions of all companies as defined in this

Act.

- Authorize and regulate cross-border securities transactions.

- Call for information from and inspect, conduct inquiries and audits of the securities

Exchanges, capital market operators, collective investment Schemes and all other

regulated entities.

- Promote investors education and the training of all categories of intermediaries in the

securities industry;

- Call for, or furnish to any person, such information as maybe considered necessary by

it for the efficient discharge of its functions.

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- Levy fees, penalties and administrative costs of proceedings or other charges on any

person in relation to investments and securities business in Nigeria in accordance with

the provisions of this Act;

2.1.9 Economic Contribution of the Capital Market

The Capital Market provides the necessary funds, which can be channeled to the

necessary economic development. Corporate bodies through the issue of securities are able to

expand their operations, or restructure their companies for optimum benefit. The government

on the other hand is able to channel such funds for development purposes, for the growth of

the economy and fulfilling their electoral promises.

Besides, the capital market provides the much needed employment through the

participants or through programmes executed from funds sourced from the capital markets.

2.1.10 The Roles of the Capital Market in the Transfer Of Funds.

Capital market exists to assist in the transfer of funds from the “excess” unit (savers)

to the “deficit” unit (investment decision makers). This function is purely a necessity of two

factors, the reliance on money as a medium of exchange in the modern economy, and the

implicit faith, which decides the market price in the enterprise systems as a means of

allocating societal wealth.

In the process of transferring funds from savers to users, securities of various types

come into existence. These became the main instruments (financial assets) that are traded in

the capital market; the securities evidenced the transfer of fund and the enlightenment to the

eventual repayment of the capital and to the resulting periodic income in the interim.

The institution, which play a large role of the capital market as divided into two

groups. One group plays strictly mediating role and the other facilitating (or service) role.

The intermediating role consists in the accumulation of funds from a variety of savers

offering the intermediary of securities in exchange, therefore, and the acceptance of the

41

responsibility in its own right to place the funds in a variety of investments considering

particular circumstance for it.

The other group, which facilitates the process of issue sale, registration and orderly

transfer includes: issuing house, share Registrars, Commercial banks, Stock Exchange.

The above roles enable fund users to concentrate on the investment problems and on

the effort to maximize the returns thereof. The savers are guaranteed with steady income

while the business firm has steady availability of capital. These functions act as a positive

pull on the total capital formation process.

2.1.11 NSE and Capital Formation

The Nigerian Stock Exchange evolved from the understanding that a viable capital

market could be relied upon to finance industrial growth and government development

projects, (Dada, 2003).

The ongoing liberalization and globalization, coupled with the up-grading of market

infrastructure have made positive impact on the performance of the Nigerian Stock Market.

Consequently, all key performance indicators such as market capitalization turn over, capital

raising and the Nigerian Stock Exchange all share index have sustained their impressive

growth over the years. The market turnover of the NSE has recorded a remarkable growth in

the last 5 years. The dramatic increase in turnover has been partly influenced by the entry of

foreign portfolio investors which over the years have seriously impeded foreign investment

flows into the country, (Daisy, 2000).

Alile, (1986) sees the growth of the Nigerian Stock Exchange as been reflected by the

growth of NSE all share index. In the last five years, the index was 12, 137.7 in 2002, it rose

to 20, 128.9 in the following year, an increase of 66% (approximately) and as at June 2007,

share index went up to 51, 330. (SEC Bulletin, 2007).

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Since 1961, when the exchange opened its shop to the public, successive Federal

Administrations have used the facilities of the institution in various forms including the

floatation of Federal Government Development Stock between 300 million to N600 million

each year, generally for on-lending to the Regional and later State Government of

developments of projects. The Federal Government renewed its interest in the market in 2004

when it issued special purpose bonds to settle pension arrears and local contractors’ debts. In

2006, the Federal Government also issued another bond valued at N527.4 billion. The Central

Bank of Nigeria has always acted as the issuing house, underwriter and buyer of last resort in

this regard (CBN, 2006).

In the last decade, the Federal Government encouraged the State and Local

Government as well as government corporations to use the capital market to close their

resource gaps. Consequently, more than five States’ Government has raised loan capital

(bonds) on the market. In 1993, the Stock Exchange listed the first municipal bonds. The

Lagos Island Local Government floated N100 million revenue bond for 1996/2000 for

financing the building of the popular SURA market. The facility has been fully redeemed.

In summary, an efficient capital market mobilizes savings and allocates a greater

proportion to those companies with the highest prospective rate of returns after giving due

allowance for risk. This allocative function is critical in determining the overall growth of an

economy. Also private and public sector should be integrated and they should see each other

as partners of progress.

Analysis of the Nigerian Capital Market Performance

The Nigerian capital market has performed fairly despite the numerous challenges and

problems some of which include: the buy and hold attitude of Nigerians, massive ignorance

of a large population of the Nigerian public of the nature and benefits of the capital market,

43

few investment outlets in the market, lack of capital market friendly economic policies and

political instability, private sector led economy and less than full operation of recent

developments like the Automated Trading System (ATS), Central Securities Clearing System

(CSC), On-line and Remote Trading, Trade Alerts and Capital Trade Points of the Nigerian

Stock Exchange.

Total New Issues

The total new issues before 1989 was below N1 billion. However, from 1989 to1996

it hovered between N1 billion to N10 billion. The amount crossed the N10 billion marks in

1997. For instance, between 1996 and 2001, a total of 172 new issues (securities of public

companies amounting to N56.40 billion) were floated in the capital market. The total new

issues were valued at N21.5 billion in 1996 but it rose to N45.6 billion in 2001. Total new

issues were N68.6 billion in 2002, N185 billion in 2003. N235.53b in 2004 and N730.54b in

2005.It crossed the trillion marks in 2006 being N1.65 trillion that year but fell to N279.25

billion in 2009.

Market Capitalization

This is the most widely used indicator in assessing the size of a capital market to an

economy. In a bearish market the market capitalization falls and vice versa for a bullish

market. Before 1988, the total market capitalization was less than N10 billion from 1988 to

1994. It hovered between N10 billion to N57 billion. In 2003 it was N1,3593 trillion,

N2.1125 trillion in 2004 and N5.12 trillion in 2006.The market capitalization recorded the

highest value of N13.2294 trillion in 2007.But this fell to N9.562 trillion in 2008 due to the

global financial meltdown. The percentage market capitalization compared to the economy’s

Gross Domestic Product (GDP) helps to assess the size of the stock market. In1981, this was

10.5%, but fell to 7.4% in 1994. It rose again to 9.3% in 1995, 10.6% in 1996; 18.9% in

2003, 25.6% in 2004 and 27.4% in 2005

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Listed Securities

The number of equities listed increased from 3 in 1961 to 13 in 1971, 93 in 1981 in

2001 and 198 in 2005. For the SSM, it was 1 in 1985 and 20 in 1995. After falling from 23 in

1993, it fell to 19 in 1997 and from then to 2005 it remains at 16. The total securities

increased from 8 in 1961 to 60 in 1971; 194 in 1981, 23 in 1991, 261 in 2001 , 288 in 2005

and 301 in 2008.It would be observed the total listed securities is still low despite almost 50

years of the existence of the Nigerian Stock Exchange.

Value of Transactions

From 1961 to1975, the annual value of the NSE was below N100 million. However,

from 1976 to 1994 it was between N100 million and N600 million. In 1995, the trading value

crossed N1 billion. It was N120, 402.60 billion in 2003, N225, 820 billion in 2004 and N4,4

trillion in 2008. From 1961 to 1994, Government Stock dominated the market between

58.91% and 99.5% whereas from 1995 the industrial securities continue to dominate the

market. Sources: CBN & NSE 2012.

2.1.12 Major Reforms in the Nigerian Capital Market

Musa, (2007), the current D.G of SEC made some reforms in the capital market to

enable it perform effectively. The reforms include the following:

1. Recapitalization of Capital Market Operations

To make operators contribute more to the growth of the real sector, the minimum paid up

capital has been renewed upwards. Issuing houses capital requirement are to move from

N150 million to N2 billion, broker dealers from N70 million to N1 billion, clearing and

settlement agencies from N500 million to N1 billion and registrars from N50 million to N500

million. Lender writers who before now had a minimum capital base of N100 million are now

45

required to have a N2 billion fund/portfolio managers from N20 million to N500 million,

while corporate sub-broker with current capital base of N5 million are now to shore up the

capital base to N50 million.

The recapitalization of operators in the capital market is to strengthen them financially

for international competitiveness and match their capital with their exposure. This will also

help to weed out quacks from the capital market as the greatest cases of irregularities and

fraud are often associated with under capitalized operators who have little or no investments

to loose. This will help the capital market operators to play new roles in the economy

including the real sector.

2. Introduction of Market Makers

An on-going development in the Nigerian Capital Market is the introduction of market

makers, whose minimum capital base is fixed at N2 billion. The commission is currently

collaborating with the Nigerian Stock Exchange to introduce primary dealer market makers

for the equity sector of the market. This is an addition to the market makers who already

operate in the bond sector.

3. Establishments of Commodity Exchange

A commodity Exchange is an exchange that facilitates trade in commodities as opposed

to shares and bonds.

The Abuja Stock Exchange was converted into Securities and Commodity Exchange and

Commenced operation on 25th July, 2006. It started with six grains which include sorghum,

maize, cowpea, soya beans, sesame seeds and millets.

Commodity Exchange is of immense benefits to farmers, agro commodity processors

and merchants as it serves as a ventable platform for them to mitigate the inherent risk in

46

agricultural production and marketing while promoting commercial farming and the growth

of the agricultural sector.

ECONOMIC BENEFITS OF COMMODITY EXCHANGE MARKETS

• Appropriate Pricing of Commodities:

With many potential buyers and sellers competing freely, Commodity Exchange provide

incentives for productive activities in such sectors as agriculture and mining whose products

are traded on such exchange.

• Risk Management

The market provides producers, processors and users of commodities with a means of

passing the price risk inherent in their business to traders who are willing to assume these

risks.

• Improved Financing Term

By reducing price risk, Commodity Exchanges enhance the credit worthiness of

commercial enterprises in their relationship with banks. This enables such producers’ access

to loan at lower interest rates and may result in higher profits for the farmers, possibly lower

prices for the end users.

• Dissemination of Market Information

Since Commodity Exchange are national or world wide in scope, they act as collection

and dissemination centre for statistics on supplies, transportation storage, purchases, export,

imports, currency values, interest rates and other important information that may be useful for

other future productive activities.

• Effective Protection of Market Participants

Trading in a commodity is normally subject to specified rules and regulations which all

market participants must comply with. The use of cleaning house also ensures that all

47

transactions are settled as at when due, thus assuming adequate protection for all market

participant.

4. Introduction of Electronic Bonus (E-Bonus Scheme)

The Securities and Exchange Commission (SEC) in July, 2005 introduced the E-bonus

scheme. The main reason behind this is to protect the investors’ interest. When a quoted

company declares a bonus issue, instead of issuing a physical certificate, the certificate is

converted into an electronic form and credited directly to the investors’ stock account in the

central Securities Cleaning System (CSCS).

Apart from E-bonus, there are other schemes like the E-IPO (Electronic Initial Public

Offer), E-Dividend (Electronic dividend payment). In E-IPO, the shares you bought are

directly credited to your CSCS account while in E-dividend; your dividend is directly paid

into your current Account number in the designated Bank.

BENEFITS OF ELECTRONIC PROCESSING OF SHARES ISSUES

Security: Shares certificate forgeries and theft are eliminated. There will be no need for

special storage facilities such as safe for certificate.

Easier Reconciliation of Accounts: Shareholders can easily update and known their total

shares just at a glance.

2.1.13 Global Capital Market Integration and Economic Growth

Links between market integration and Growth: Transaction costs are high for foreign

investors in many emerging markets. Illiquidity (difficulty in finding a buyer when you are

selling and vice versa) combined with taxes (income, withholding and transaction base) and

various capital market restrictions (official registration of securities transactions and

exchange controls) make foreign market participation very costly to many investors. This

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section explores the impact that would market integration has on the cost of capital in

developing countries.

Many emerging markets are segmented. This means that investors are local residents

and foreign participation in the local market is limited. Segmentation has many causes, for

examples, foreigners may be prohibited from participating in the local market. The cause may

be more subtle in terms of regulatory, institutional, and tax barriers to investment.

Nevertheless, a market dominated solely by local investors is not likely to be integrated into

global capital markets.

In a segmented market, investors’ portfolios are exposed to price fluctuations induced

by the state of the local economy. Even though the investor might hold many stocks, this

portfolio, is not fully diversified, because all the stocks are linked to the local economy. For

example, if a recession or currency crisis occurs in the local economy all stock will likely

lose value. The extent of diversification of that local portfolio does not matter. Since all the

stocks originate within one country, they all are exposed to fluctuations emanating form the

local economy. Logically, the investors in the segmented capital market require

compensation for the risk, this compensation takes the form of higher expected rates of

return, while translates into higher costs of capital for corporations operating within that

market.

In integrated capital markets, however, compensation is different, the investors holds

securities from many countries. This is a world diversified portfolio. Whereas local economic

event will influence stocks in any one country, the investor has a portfolio that reaches across

many national borders. A negative stock (bad news) in one country may be offset by a

positive stock (good news) in another country. As a result, the investor does not demand

compensation for local market volatility. In other words, the diversified international

portfolio provides a natural hedge for country-specific events. The investor, although still

49

concerned about negative shocks in any one country, does not require a risk premium for the

lack of country diversification. The expected rate of return on the local stock is determined by

how it interacts with all of the stock in the investor’s world wide portfolio.

Recent research by Bekaert and Harvey (1995), suggest that the expected risk

premium on equity investments in many emerging markets can be reduced by increasing their

integration into world capital markets. Their research proposes an econometric model that

examines two possible regimes. Segmented capital markets and integrated capital markets.

Using historical data, the model reveals the evolution of many markets from closed countries;

however, move in the other direction, from integrated to close.

As explained above, the expected rates of return on equity differ in segmented and

integrated markets. In the segmented market, the expected rate of return is linked to local

market volatility. In the integrated capital market, the expected rate of return is linked to the

way the security interacts with a geographically broader investment portfolio why then would

the cost of capital be lower in integrated markets? First, in emerging capital markets, the local

market volatility is very high (Bekaert and Harvey, 1997a). This high volatility leads to high

expected rates of return on equity investments in segmented capital markets. Second,

emerging markets are attractive investments for world investors’ because these markets serve

as a head for such investors’ portfolios (the local economies are not highly correlated with

developed economies). Since the industrial structure of emerging market is often much

different form that of developed markets, bad news in developing markets is often cushioned

with good news in emerging markets, and vice versa. This natural hedging property is very

important. It causes a high demand for the emerging market’s securities by foreign investors

– if the emerging market is integrated into world capital markets. This demand arise equity

prices and eventually reduces expected rates of return. This analysis shows that the cost of

capital should be lower in integrated capital markets than in segmented capital markets. The

50

fact that many emerging market enterprises are raising capital in other countries, American

Depository Receipts (ADRs) or Global Depository Receipts (GDRs) is indirect evidenced of

a lower cost of Capital in world markets.

How do the lower expected rates of return on equity translate into economic growth?

Lower discount rates have an immediate impact on corporations operating in the developing

market. In segmented capital markets with high discount rates, many investment projects are

rejected because the projects’ expected rates of return are too low. For examples, suppose an

investment project could yield an average return of 25% over 10 years. If prospective equity

investors require a minimum of 30% return for this project, the projects will not be

undertaken. Lowering the discount rate makes an additional set of investments attractive.

Projects that would otherwise not be undertaken become viable, creating jobs and other

benefits to the economy.

Lower discount rates have an immediate impact on multinational corporations’

willingness to make direct investment in the emerging market. Suppose the multinational

corporation is based on the United State and require projects of average risk in the United

State to yield 15%. A similar investment project in the emerging market promises to yield

25% over 10 years (calculated in U.S dollars). Will this project be undertaken? Not

necessarily, the 15% required rate of return only applies to projects of average risk within the

United States.

Projects are always evaluated with a discount rate specific to the particular evaluated with a

discount rate specific to the particular investment project. The project in the segmented

emerging market is not likely to have the same discount rates as the project in the United

States.

Indeed, if the relevant required rate of return in the emerging market was 30%, the

multinational corporation would reject the project with an expected return of 25%. Lower

51

discount rates increase the extent to which multinational corporations make a long-term

commitment of resources to a country. This type of investment has many benefits to the local

economy. It leads to job creation. It is long term in nature, and often is associated with

international expertise being passed on to the local population (transfer of knowledge). These

factors contribute positively to economic growth.

2.1.14 Problems /Challenges of the Nigerian Capital Market

Al-faki, (2006) the direct of SEC pointed out some of the problems of the Nigerians

capital markets and the challenges facing it. They include:

- Paucity of Information

The market turnover in the Nigerian Capital Market is very low. Nigeria with

a population of over 120 million people have only 2 million investors and a large

proportion of the population are still ignorant of the nature and benefits of the capital

market. SEC can not carry out the awareness alone, they need the effort of

Government, non-governmental organizations (NGOs) and members of the academic

community to carry out the awareness campaign.

- Formulation of Inappropriate Economic Policies

For the capital market to move the economy, the Nigerian government should

formulate friendly economic policies. For example, tax holiday and other concessions

on capital market transactions for quoted companies especially those in second tier

market.

The biggest challenge facing the market is the creation of a highly liquid market

whereby investors can buy and sell with relative ease and very large transactions without

significant changes in

2.2 Empirical Review

52

Under this section, practical steps taken by some researchers on the related subject

matter is reviewed.

2.2.1 Empirical Works

There have been growing concerns and controversies on the role of the stock markets

on economic growth and development (Oyejide 1994, Levine and Zervos 1996, Demirgukunt

and Levine 1996; Nyong 1997; Obadan 1998; Sule and Momoh 2009; Ewah, Esang and

Bassey 2009). There have been mixed results; while some are in support of a positive link,

some negative link and others do not find any empirical evidence to support such conclusion

for instant Atje and Jovanovic, (1993) found in a cross-country study of Stock and economic

growth of 40 countries from 1980 to 1988 that there was a significant correlation between the

average economic growth and stock market capitalization.

Levine and Zervos, (1996) examined whether there was a strong empirical

relationship between stock market development and long-run economic growth. They found a

strong correlation between overall stock market development and long-run economic growth.

Demivergic-kunt and Levine, (1996) using data from 44 countries for the period 1986 to

1993 found that different measures of Stock exchange size are strongly correlated to other

indicators of activity levels of financial, banking, non-banking institutions as well as to

insurance companies and pension funds. They concluded that countries with well-developed

stock markets tend to also have well-developed financial intermediaries.

Again, Demiurgic-kunt and Maksimovic, (1998) have shown and re-emphasized the

complementary role of the stock market and banks that they were not rival or alternative

institution using 30 countries from 1980 to 1991. Levine and Zervos (1998) used pooled

cross-country time series regression of 47 countries from 1976 to 1993 to evaluate whether

stock market liquidity is related to growth, capital accumulation and productivity. They

towed the line of Demilergic-kunt and Levine, (1996) by conglomerating measures such as

53

stock market size, liquidity and integration with world market, into index of stock market

development. The rate of Gross Domestic product (GDP) per capital was regressed on a

variety of variables designed to control for initial conditions, political instability, investment

in human capital and macro economic condition and then, included the conglomerated index

of stock market development. They found empirically that the measures of stock market

liquidity were strongly related to growth, capital accumulation and productivity while stock

market size does not seems to correlate to economic growth.

Levine and Zervos, (1996) examines whether there is strong empirical association

between stock market development and long-run economic growth. The study used pooled

cross-country time-series regression of forty –one countries from 1976 to 1993 to evaluate

this association. The study shows the line of Demirguckunt and Levine, (1996) by

conglomerating measures such as stock market size, liquidity, and integration with world

market into index of stock market development.

The growth rate of Gross Domestic Product (GDP) per capital was regressed on a

variety of variables designed to control for initial conditions, potential stability, investment in

human capital and macro-economic conditions, and then include the conglomerated index of

stock market development. The finding was that a strong correlation between overall stock

market development and long-run economic growth exist. This means that the result is

consistent with the theories that imply a positive relationship between stock market

development and economic growth.

Nyong, (1997) developed an aggregate index of capital market development and used

it to determine its relationship with long-run economic growth in Nigeria. The study

employed a time series data form 1970 to 1994. Four measures of capital market

development ratio of market capitalization to GDP (in %), the value of equities transactions

relative were used. The four measures were combined into one overall composite index of

54

capital market development using principal component analysis. The financial market depth

was included as control. It was found that the capital market development is negative and

significantly correlated with the long-run growth in Nigeria.

Demiurgic-Kun and Maksimovic, (1998) cited in Henry, (2000) found a relationship

between economic growth and the stock market activity in the field of transmission of

security (secondary market) more than in funds channeling (primary market). Berlett, (2000)

demonstrated that a rising stock prices raises the wealth of the economy (wealth effect) by

encouraging increase in consumers’ consumption and increase in investment.

Ewan, et al (2009) appraises the impact of the capital market efficiency on the

economic growth of Nigeria using time series data form 1961 to 2004. They found that the

capital market in Nigeria has the potential of growth inducing but it has not contributed

meaningfully to the economic growth of Nigeria because of low market capitalization, low

absorptive capitalization, illiquidity, misappropriation of funds among others. Hanis, (1997)

did not find hard evidence that stock market activity affects the level of economic growth.

Pat D (2010) studied “An Empirical Analysis of the Impact of the Nigerian Capital

Market on Her Socio-economic Development” In his analysis, he specified that the socio-

economic development (proxy by Gross Domestic Product) is significantly influenced by the

capital market indices (market capitalization, new issues, value of transaction and total

listing). It was found that the market capitalization and value of transaction had positive but

insignificant impact on the GDP whereas the total new issues had a negative influence on

GDP. However, the total listing was positively signed and also statistically significant. The

findings agree with Ariyo and Adelegan (2005) and Ewah et al. (2009) who found that the

capital market in Nigeria has the potentials for growth inducing but have not contributed

meaningfully to the economic growth of Nigeria due to low market capitalization, small

55

market size, few listed companies low volume of transactions, low absorptive capitalization,

illiquidity etc.

2.3 DIFFERENCES BETWEEN THE RESEARCHER’S VIEW AND PREVIOUSLY

REVIEWED LITERATURE

In the works of Oyejide (1994), Levine and Zervos (1996), Demirgukunt and Levine

(1996), Nyong (1997), Obadan (1998), Sule and Momoh (2009); Ewah, Esang and Bassey

(2009) there have been controversies on the role of the stock markets on economic growth

and development. There have been mixed results; while some are in support of a positive

link, some negative link and others do not find any empirical evidence to support such

conclusion. However, the researcher will come up with either positive or negative link

between the variables under study. Thus, the findings and conclusion was supported with

empirical evidence.

Atje and Jovanovic, (1993), found in a cross-country study of Stock and economic

growth of 40 countries from 1980 to 1988 that there was a significant correlation between the

average economic growth and stock market capitalization. The researcher uses a country;

Nigeria as a study case with annual time series which covers the period of years; 1990-2012.

The study appraises capital market and its Implications on the Economic growth in Nigeria.

The researcher tries to evaluate the impact of capital market on the Nigerian economic

growth. In doing so, she uses time-series regression of 23 observations i.e. 1990-2012, the

Capital Market is captured by the value of transaction at the Nigerian Stock Market which

comprises of government securities, industrial loan stock and equities (all in N Million) while

Economic growth is captured by Gross Domestic Product. However, Levine and Zervos,

(1996) examines whether there is strong empirical association between stock market

56

development and long-run economic growth. The study used pooled cross-country time-

series regression of forty –one countries from 1976 to 1993 to evaluate this association. The

study shows the line of Demirguckunt and Levine, (1996) by conglomerating measures such

as stock market size, liquidity, and integration with world market into index of stock market

development.

In the works of Demirguckunt and Levine, (1996), the growth rate of Gross Domestic

Product (GDP) per capital was regressed on a variety of variables designed to control for

initial conditions, potential stability, investment in human capital and macro-economic

conditions, and then include the conglomerated index of stock market development but the

researcher regressed Gross Domestic Product (GDP) on the value of Transaction at the

Nigerian Stock Exchange (TNS). She also regresses Domestic investment (INV) on the value

of Transaction at the Nigerian Stock Exchange (TNS).

57

References

Abel, E. (2009), Stock Market Development and Private Investment Growth in Nigeria. Department of Banking and Finance Ebonyi State University, Nigeria.

Adebiyi, MA. (2005), Capital Market Performance and the Nigerian Economic

Growth, In: OF Oluwatayo, A Olasupe (Eds) Issues in money, finance and Economic Management Lagos, University of Lagos

Afje, R. (1993), Stock Market and Department. European Economic Review, 37: 632

– 640.

Akingbohungbe, SS (1996), The Role of the Financial Sector in the Development of

the Nigerian Economy. Paper presented at a workshop organized by Centre for

Africa law and development Studies.

Al-Faki, M (2006), The Nigerian Capital and Socio-economic Development Paper

presented at the 4th

Distinguished Faculty of Social Science Public Lecture;

University of Benin, 26 July, P.p. 9-16.

Alile, HI (1984), The Nigerian Stock Exchange: Historical Perspectives, Operations

and Contributions to Economic Development, Central Bank of Nigeria Bullion

2: 165-69.

Alile, HI (1997), Government must divest. The Business Concord December 2.P,8.

Alile, HI (2002), Establishing a stock market – the Nigerian Experience. Paper

presented at the Conference of promoting and Development Capital market in

Africa Abuja, No 11-13.

Anyanwu, JC (1993), Monetary Economics Theory, Policy and Institution, Onitsha:

Hybrid Publishers Ltd, pp. 247-274. Anyanwu, JC (1998), Stock Market Development and Nigerian Economic Growth,

Nigerian Financial Review 7(2): 6 – 13.

Anyanwu, JC. Onyefusi, SA, (1997), Structure of the Nigerian Economy (1960-1997).

Onitsha JOANEE Educational Publishers Ltd. P. 453. Ariyo, A. Adelegem, O. (2005), Assessing the impact of Capital Market Reforms in

Nigeria: An incremental Approach. Paper presented at the 46th

annual

Conference of the Nigeria Economic Society in Lagos on August 2005.

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Asika, N (2001), Research Methodology in Behavioural Science: Longman Publishers, Ikeja Lagos.

Central Bank of Nigerian (CBN), Statistical Bulletins of 2005, 2006 and 2008, Abuja

Central Bank of Nigeria Publications.

Demirgue, Kunt A Asli. Levia R (1996), Stock Market, Corporate Finance and

Economic Growth: An overview. The World Bank Review 10(2): 233-239.

Demirgue, Kunt A. Levin R (1996), Stock Market Development and Financial

Intermediaries: Stylized facts, the word bank Economic Review 10 (2): 241 –

265.

Edo, SE (1995), An Estimation of a Modelo of long-term Securities Investment in

Nigeria.. Nigeria Economic and Financial Review, 12: 45-53.

Ekundaya, IK (2002), Creating a conducive Environment for invest in the Nigerian

Capital Market. Paper presented at Public Enlightenment on opportunities in

the Capital Market for industrial Development of Kogi State, Lokoja 29th

March to 1st April, 2002.

Equakun, Co (2005), The Nigerian Capital Market: Impact on Economic Growth.

Master Thesis, Unpublished, Benin City University of Benin. Ewah, SOE. Esang, AE.: Bassey, JU (2009), Appraisal of Capital Market Efficiency

on Economic Growth in Nigeria. International Journal of Business and

Management, December, pp 219 – 225.

Geert, B. (1997), Capital Market: An Engine for Economic Growth. Stanford

University, Stanford CA, 94305. Hamid, M. (2001), Stock Market Development and Economic Growth: Evidence from

Developing Countries. Department of Economics, University of Wisconsin-

Milwaukee.

Harris, RDF (1997), Stock Markets and Development: A Re-assessment. European

Economic Review: 1: 136-139.

Henry, PB (2000), Do Stock Liberalization causes Investment Booms. Journal of

Financial Economics 58: 301-334

Isabella M (2009), Stock markets in Africa: bidding for growth amid global turmoil.

Overseas Development Institute 111 Westminster Bridge Road, London SE1

7JD.

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Levine, R. Zervos, S (1996), Stock Market Development and Long run Growth. American Economic Review 88(3) 537-558.

Levine, R. (1996), Stock Markets: A Spur to Economic Growth. Finance and Private

Sector Development Division of the World Bank’s Policy Research

Department.

Mazharul, H. (2009), An Application of Co-Integration Technique for Detecting Influential Risk Factors of the Australian Stock Market. School of Economics

& Finance, University of Western Sydney, Australia. Nigerian, Stock Exchange (NSE) Fact Book 2004-2009, Lagos the Nigerian Stock

Exchange.

Njong, MO (1997), Capital Market Development and Long run Economic Growth:

Theory, Evidence and Analysis First Bank Review. December pp. 13-38.

Nwankwo, G. O. (1991), Money and Capital Markets in Nigeria Today. Lagos

University of Lagos Press Obadan, M I (1998), Capital Market and Nigeria’s Economic Development.

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Time Series Analysis. Department of Management and Accounting Faculty of

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Port Harcourt Street, Ogui New Layout, Enugu. Osaze, BE (1995), Paradigm shifts misplaced concreteness and the Nigerian Financial

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Pat, D (2010), An Empirical Analysis of the Impact of the Nigerian Capital Market on

Her Socio-economic Development. Department of Accounting, University of

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61

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Design

The research design employed in this research work is ex post facto method. This

method is chosen by the researcher because secondary data will be collected as no attempt is

made to control or manipulate the relevant independent variables. The researcher shall adopt

the multiple regression analysis based on the classical linear regression model, otherwise

known as Ordinary Least Square (OLS) technique. The researcher’s choice of technique is

based not only on its computational simplicity but also as a result of its optimal properties

such as linearity, unbiassedness, minimum variance, zero mean value of the random terms,

etc (koutsoyiannis 2001, Gujarati 2004).

3.2 Nature and Sources of Data

In line with approach adopted by Pat D (2010) and Ewal et al (2009) in their works on

capital market and economic growth, this work made use of the secondary data. Such data

were sourced from Central Bank of Nigeria, Published from annual report and the Nigerian

Stock exchange fact book, CBN Statistical Bulletin and annual report.

The data took the following forms: Total New Issues as published by the Nigeria

Stock Exchange on annual basis from 1990-2012, market capitalization, transaction at the

Nigerian stock exchange bulletin from 1990-2012. The GDP and Gross Fixed Capital

Formation on annual basis as published in the CBN statistical bulletin from 1990-2012.

3.3 Description of Research Variables

As the researcher uses multiple regression models, the variables employed are

dependent and independent variables.

62

3.3.1 Dependent Variables

Ensuring rapid economic growth is another major macroeconomic goal. Economic

growth simply can be defined as a quantitative increase in a country’s output of goods and

services. However, national income is often used to embrace all measures of a nation’s output

of goods and services. As can be observed, national income has a lower value than Gross

National Product and this explains why GDP is chosen as the broadest measure of economic

growth. To get the correct value of economic growth, the research uses Real Gross Domestic

Product. This is the actual GDP which has been adjusted for inflation. The researcher obtains

the dependent variable by dividing as follows

Real GDP Per Capita (RGDPCA) = Real Gross Domestic Product Total Population

Thus, Real GDP Per Capita will be used as the dependent variable in the first model.

However, to capture the investment level in the second model, the researcher uses Gross

Fixed Capital Ratios which obtained as follows;

Gross Fixed Capital Ratios (GFCR) = Gross Fixed Capital Real Gross Domestic Product

The rational for using of was to know the domestic investment. Because it is net increase in

physical assets (investment minus disposal) within the measurement period.

3.3.2 Independent Variables

The specified explanatory variables in the first and second models are Market

Capitalization Ratio (MCAPR), Total New Issues Ratio (TNIR) and the Ratio of Transaction

at the Nigerian Stock Exchange (TNSR).

3.3.2.1 Market Capitalization Ratio (MCAPR)

This MCAPR is obtained by dividing Market Capitalization by the Real GDP. The

assumption behind this measure is that overall market size is positively correlated with the

63

ability to mobilize capital and diversify risk on an economy wide base. In conformity with the

works of Levine and Zervos (1996), Pagano (1993), Mohtadi and Agarwal (2004) etc, stock

market capitalization ratio was used as a proxy for stock market size.

Market Capitalization Ratio (MCAPR) = Market Capitalization Real Gross Domestic Product

3.3.2.2 Total New Issues Ratio (TNIR)

This measure equals the total new issues on the stock exchange divided by the real

GDP.

The total new issues ratio measures the rate at which issues are offered for sale in the stock

market and therefore should reflect positive liquidity on the economy-wide base. The total

new issues ratio also complements the market capitalization ratio. In line with the works of

Levine and Zervos (1996), Pagano (1993), Mohtadi and Agarwal (2004) etc, this was used as

a proxy for capital market liquidity.

Total New Issues Ratio (TNIR) = Total New Issues Real Gross Domestic Product

3.3.2.3 Ratio of Transaction at the Nigerian Stock Exchange (TNSR)

This measure equals total transaction at the Nigerian stock market divided by the real

Gross Domestic Product. The total value traded ratio measures the organized trading from the

exchange as a share of national output. As the ratio of this transaction increases, it is expected

that it will contribute positively to the growth of the economy. However, Buelen and Cuyvers

(2005), Mohtadi and Agarwal (2004) and Vadlamannati and Irala (2007) used Ratio of

Transaction at the Nigerian Stock Exchange as a proxy for capital market ratio of

transactions.

Ratio of Transaction at the Nigerian Stock Exchange = Transaction at the Stock Exchange Real Gross Domestic Product

64

3.3.2.4 STOCHASTIC DISTURBANCES

This is also known as the error terms. They are those variables that can influence the

dependent variables but were not included in the regression model. In this study they include

exchange rate to US Dollars, foreign direct investment and government expenditure.

3.4 TECHNIQUES OF DATA ANALYSIS

The researcher used multiple time series ordinary least square regression to evaluate

the relationship between capital market and economic growth. The justification for adopting

this analytical technique was based on the optimal properties such as linearity, unbiassedness,

minimum variance, zero mean value of the random terms, etc (koutsoyiannis 2001, Gujarati

2004). The estimated parameter was evaluated by determining whether they have satisfied the

statistical a priori criteria. In the course of the data analysis, the test statistics were evaluated

with the following; correlation coefficient, t-test and f-test. This technique chosen will aid the

researcher in ascertaining the relationship between the variables stated in the model

simultaneously.

Y = B0 + B1X1 + B2X2 + B3X3 + Ut

Where Y = Dependent Variable

X1, X2 and X3 = Explanatory Variables

B0 = Constant

B1, B2 and B3 = Slope of coefficients

Ut = Stochastic variable

Pat D (2010) studied “An Empirical Analysis of the Impact of the Nigerian Capital

Market on Her Socio-economic Development” In his analysis, he specified that the socio-

economic development (proxy by Gross Domestic Product) is significantly influenced by the

capital market indices (market capitalization, new issues, value of transaction and total

listing).

65

Thus, the researcher evaluates the strong relationship between Capital Market and

economic growth using capital market indicators.

3.5 Model Specification

The model is based on Levine (2002), Demirgue-Kunt and Levine (1996), Levine

and Zervos (1996), Demirgue-Kunt et al. (1996), Ewah et al. (2009) and Pat D(2010) which

have investigated linkage between stock market and economic growth. Model which specifies

that the socio-economic development (proxy by GDP) is significantly influenced by the

capital market indices (market capitalization, new issues, value of transaction and total

listing) was used by them.

In the bank-based and market-based theory, Levine (2002) stated a model considering

the cross-country regression equations;

G = a’X + bS + U(1)…………… (1)

G = c’X + dF + U(2)…………… (2)

G = f’X + hS + jF + U(3)………..(3)

G is real per capita GDP growth.

X is a set of conditioning information, i.e., standard growth determinants.

S measures financial structure. Larger values of S signify more market-based, while smaller

values signify more bank-based.

F measures overall financial sector development, i.e., the level of development of banks,

nonbanks, and securities markets. Larger values of F signify a greater level of financial

services.

U(i) is the error term in equation i=1, 2, and 3 respectively. The small letters, a, b, c, d, f, h,

and j are coefficients.

In the works of Demirgue-Kunt and Levine (1996), Levine and Zervos (1996),

Demirgue-Kunt et al. (1996), Ewah et al. (2009) and Pat D(2010), their model was specified

66

in relation to their investigation on stock market and economic growth. The socio-economic

development (proxy by Gross Domestic Product) is significantly influenced by the capital

market indices (market capitalization, new issues, value of transaction and total listing) are

formulated as follows:

GDP = F (MCAP, TNI, TNS)

GDP = a + a1MCAP + a2TNI + a3TNS + U

Where the a priori expectation is: a1 , a2, a3. a4 > 0 and

GDP = Gross Domestic Product,

MCAP = Market capitalization,

TNI = Total News Issues,

TNS = Total value of transactions,

U = Disturbance Term,

a = Intercept ,a1 – a4 = coefficient of the independent variables

Therefore, a leaf was borrowed from the models stated above by the afore-mentioned

references.

In this study, hypothesis has been maintained on the assumption that Nigeria’s

economic growth is determined by Gross Domestic Product and the capital market could be

captured by Market Capitalization, Total New Issues, Total Value of Transaction at the

Nigerian Stock Exchange and Total Listed Securities in the Stock Market. More so, the level

of Investment is captured by the Gross Capital Formation. Thus, the model is represented in a

functional form. It is shown as below:

GDP = F (MCAP, TNI, VLT, TLS)…………. 1

GCF = F (MCAP, TNI, VLT, TLS)…………...2

Where

GDP = Gross Domestic Product (Dependent variable)

67

GCF = Gross Fixed Capital Formation (Dependent variable)

MCAP = Market Capitalization (Independent variable)

TNI = Total New Issues (Independent variable)

VLT = Total Value of Transaction at the Nigerian Stock Exchange (Independent variable)

TLS = Total Listed Securities in the Stock Market (Independent variable)

However, the researcher transforms the data so as to obtain the ratio of the estimated

parameters. Hence, the use of the following variable ratios below;

GDP = Gross Domestic Product Per Capita,

MCAP = Market capitalization Ratio,

TNI = Total New Issues Ratio,

TNS = Total value of transactions,

GCF = Gross Capital Formation

Gross Capital formation (GCF) was adopted because in every investment growth,

savings are mobilized to form capital. Thus capital formation is vital to investment

growth.

In a linear function, it is represented as follows with respect to the hypotheses;

Hypothesis 1

Capital market does not have significant impact on the Nigerian economic growth

RGDPCA = bo + b1MCAPR + b2TNIR + b3TNSR + U1 ………………………………1

Hypothesis 2

Capital Market has not caused any significant change in the investment growth in

Nigeria.

GCF = bo + b1MCAPR + b2TNIR + b3TNSR + U2 ……………………………..2

68

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Intermediaries: Stylized facts, the word bank Economic Review 10 (2): 241 –

265.

Ewah, SOE. Esang, AE.: Bassey, JU (2009), Appraisal of Capital Market Efficiency on Economic Growth in Nigeria. International Journal of Business and

Management, December, pp 219 – 225.

Gujarati D.N (2004), Theory of Economics United State Military Academy West Point, Mc Graw-Hill Inc Book Co-Singapore. Koutsoyiannis, A. (2001), Theory of Econometrics: Pal Grave Houndmills,

Basingstoke, Hamshire RG21 6xs and 175

Levine, R. Zervos, S (1996), Stock Market Development and Long run Growth. American Economic Review 88(3) 537-558.

Nigerian, Stock Exchange (NSE) Fact Book 2004-2009, Lagos the Nigerian Stock

Exchange.

Pat, D (2010), An Empirical Analysis of the Impact of the Nigerian Capital Market on

Her Socio-economic Development. Department of Accounting, University of

Benin, Benin City, Nigeria. Social Science, 24(2) PP.135-142.

69

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

In this chapter, the data sourced shall be presented and the analysis of the data follows suit.

More so, it shall capture the tests of three hypotheses specified in chapter one.

4.1 DATA PRESENTATION

The presentation of the data encapsulates the important data which is related to the

objectives of the study. Table 4.1 represents the stated data such as Total New Issues (TNI),

Market Capitalization (MCAP) and Value of Transaction at the Nigerian Stock Exchange

(TNS) which were gathered from Nigerian Stock Exchange and CBN Statistical Bulletin,

Volume 20, 2009 spinning from 1990-2009.

TABLE 4.1.1 TOTAL NEW ISSUES (TNI), MARKET CAPITALIZATION (MCAP)

AND VALUE OF TRANSACTION AT THE NIGERIAN CAPITAL MARKET (TNS)

FOR 1990-2012

YEAR TNI(N BILLION ) MCAP (N BILLION)

TNS(N MILLION)

1990 1.342 16.3 225.4

1991 1.5 23.1 242.1

1992 3.5 31.2 491.7

1993 4.6 47.5 804.4

1994 2.56 66.3 985.9

1995 7.084 180.4 1,838.80

1996 21.5 285.8 6,979.60

1997 7.6 281.9 10,330.50

1998 16.4 262.6 13,571.10

1999 44.4 300 14,072.00

2000 35.5 472.3 28,153.10

2001 45.6 662.5 57,683.80

2002 68.6 764.9 59,406.70

2003 185 1,359.30 120,402.60

2004 235.53 2,112.50 225,820.00

2005 730.54 2,900.10 262,935.80

2006 1650 5,121.00 470,253.40

2007 2400 13,294.60 1,076,020.40

2008 2600 9,563.00 1,679,143.70

2009 279.25 7,030.80 685,716.20

2010 302.02

9,918.2 799,910.9

2011 310.89 9,672.7 638,925.7

2012 312.18 14,800.9 808,994.3

70

Sources: Nigerian Stock Exchange Fact book (Various years), CBN Statistical Bulletin, Volume 23, 2012. Considering the activities of stock exchange market, it is observed from 1990-1993 that there

was a gradual and steady increase in the total new issues. However, in the year 1994, there

was a drop from N4.6 Billion to N2.56 Billion. The market witnessed a tremendous and

significant increase 1998-2005. There was an obvious growth in the total new issues because

the year; 2005 had N730.54 Billion while the others years; 2006, 2007, 2008 and 2009

witnessed issues of N1.65 trillion, N2.4 trillion, N2.6 trillion and N279.25 trillion

respectively. More so, in the years 2010, 2011 and 2012, it was seen to progressively rising

from N302.02 trillion to N310.89 trillion to N312.18 trillion respectively.

More so, market capitalization was rising from 1990-1997 but witnessed a little decrease in

1998 by 6.9%. However, there was a continuous growth in the market capitalization from

1999-2007. It later dropped from N9, 563 Billion to N7, 030.80 Billion in 2008 and 2009. In

the year, 2010, market capitalization increased to N9,918.2 Billion. However, there was a

slight drop to N9,672.7 Billion in year 2011. There was a tremendously increase to

N14,800.9 Billion in the year 2012.

The values of transactions at the Nigerian stock exchange was increasing from 1990-1995.

Although, it was N985.9 Billion in 1994, there was a speedy growth from 1995-2008. There

came a drop in the value in 2009. However, in 2010, 2011 and 2012, there was a rise, fall and

rise trend respectively as it can be seen from table 4.1.1.

FIGURE 4.1.1

Total New Issues (TNI) for 1990-2012

71

Years

It can be seen from figure 1.1.1 that there was small increase in the total new issues. The

growth of TNI trended high to a peak in 2005 but witnessed a sharp decrease in 2006.

However, the increase continued from 2008 and 2012.

72

FIGURE 4.1.2: Market Capitalization for 1990-2012

Years

Obviously, the increase in the market capitalization is supposed to bring about positive

changes in the stock exchange market. The market sustained a continous growth with respect

to the capitalization but witnessed a decrease in 2008 which had N9,563 while 2009 had

N7,030.80 Billion. However, there was a slight drop to N9,672.7 Billion in year 2011. There

was a tremendously increase to N14,800.9 Billion in the year 2012.

73

FIGURE 4.1.3

Value of Transaction at the Nigerian Stock Exchange for 1990-2012

Years

It is a clear view from the above figure 4.1.3 that values of transactions at the Nigerian stock

exchange witnessed growth from 1990-1995. Although, it was N985.9 Billion in 1994, there

was a rapid increase from 1995-2008. There came a decrease in the value in 2009. However,

in 2010, 2011 and 2012, there was a rise, fall and rise trend respectively

4.2 DETERMINATION OF VARIABLES

In the model specification, the identified variables were chosen with respect to the

highlighted objectives of the study. The variables specified in the model are market

capitalization ratio, total new issues ratio, ratio of transaction at the Nigerian stock exchange,

ratio for Gross capital formation and Real GDP per capita.

4.2.1 REAL GROSS DOMESTIC PRODUCT PER CAPITA

This was obtained by dividing the Real Gross Domestic Product (RGDP) with the

total population. The population figures were projections from 1990 to 2012. The RGDP per

capita was used as a proxy for economic growth.

TABLE 4.2.1 DETERMINATION OF REAL GROSS DOMESTIC PRODUCT PER

CAPITA

YEAR REAL GDP (N,MILLION)

POPULATION (POP)

REAL GDP PER CAPITA

74

Source: CBN Statistical Bulletin (Volume 23, 2012) Official Census of the Figures To trace the movement of the above listed data, a simple bar graph representing

movement in Real GDP per capita spinning from 1990-2012 shall be examined.

FIGURE 4.2.1

REAL GDP PER CAPITA FROM 1990-2012

1990 267550 90.56 2954.40

1991 265379.1 93.16 2848.64

1992 271365.5 95.81 2832.33

1993 274833.3 98.49 2790.47

1994 275450.6 101.2 2721.84

1995 281407.4 103.91 2708.18

1996 293745.4 106.64 2754.55

1997 302022.5 109.37 2761.48

1998 310890.1 112.11 2773.08

1999 312183.5 114.85 2718.19

2000 329178.7 117.61 2798.90

2001 356994.3 120.37 2965.81

2002 433203.5 123.13 3518.26

2003 477533 125.91 3792.65

2004 527576 128.71

4098.95

2005 561931.4 136.6 4113.70

2006 595821.6 140.3 4246.77

2007 634251.1 144.76 4381.40

2008 674889 148.52 4544.10

2009 716949.7 152.83 4691.16

2010 776,332.21 158.91 4885.36

2011 834,161.83 160.23 5206.03

2012 888,893.00 167 5322.71

75

Years

The Real GDP Per Capita has maintained a fluctuating trend. This can be seen from

figure 4.2.1. It is observed that Real GDP Per Capita witnessed a decreasing trend from 1990-

1995. There came a significant increase from 1996-2012.

4.2.2 MARKET CAPITALIZATION RATIO

The stock market capitalization ratio was obtained by dividing the market capitalization

ratio, used as a close variable to capture stock market size and also one of the explanatory

variables. This is inconformity with the works of Levine and Zervos (1998) and Demirguc-

kunt and Levine (1996) etc.

TABLE 4.2.2 DETERMINATION OF MARKET CAPITALIZATION, TOTAL NEW

ISSUES AND VALUE OF TRANSACTION AT THE NIGERIA CAPITAL MARKET

RATIOS FOR 1990-2012

YEAR RGDP(In Million)

MCAP PER RGDP

TNI PER RGDP TNS PER RGDP

1990 267550 60923.19 5056.92 842.46

1991 265379.1 87045.29 5527.60 912.28

1992 271365.5 114974.09 12897.73 1811.95

1993 274833.3 172832.04 16737.42 2926.87

1994 275450.6 240696.52 9293.86 3579.23

1995 281407.4 641063.46 25173.47 6.5343

1996 293745.4 972951.41 73192.64 23.7607

1997 302022.5 933374.17 25163.69 34.2044

76

1998 310890.1 844671.48 527517.60 43.6524

1999 312183.5 960973.27 142224.05 45.0761

2000 329178.7 1434782.99 107844.16 85.5253

2001 356994.3 1855771.93 127733.13 161.5819

2002 433203.5 1765682.87 158355.14 13.7134

2003 477533 2846504.85 38740.78 252.14

2004 527576 4004162.43 446438.05 428.03

2005 561931.4 5160950.25 1300051.93 467.91

2006 595821.6 8594854.57 2769285.30 789.25

2007 634251.1 20961098.85 3783990.28 16.9653

2008 674889 141697375.42 3852485.37 2.4880

2009 716949.7 98065457.03 389497.34 956.4356

2010 776,332.21 7827.349822 257046.62 97.052

2011 834,161.83 8623.877821 268314.14 130.56

2012 888,893.00 6005.668574 284737.33 109.88

Source: CBN Bulletin

Below is a time series simple bar graph showing the trend in the market capitalization ratio

from 1990-2012. The market capitalization ratio had an impressive growth from the period

under study but there was a drop 2009-2012 as could be seen from figure 4.2.2

Figure 2.2.2

MARKET CAPITALIZATION RATIO FROM 1990-2012

Years

77

4.2.3 RATIO OF TOTAL NEW ISSUES (TNIR)

This was obtained by dividing the total new issues (TNI) by the real gross domestic

product (RGDP). This data was used as a proxy for capital market. It is in line with the works

of Mohtadi and Agarwal (2004), Levine and Zervos (1996) etc.

FIGURE 4.2.3 RATIO OF TOTAL NEW ISSUES (TNIR) FROM 1990-2012

Years

4.2.4 RATIO OF TRANSACTION AT THE NIGERIAN STOCK EXCHANGE

Ratio of transaction at the Nigerian stock exchange was obtained by dividing the

value of the transaction at the Nigerian stock exchange with real gross domestic product. It

was also used as a proxy to capture the capital market. This is in line with the work of Yarter

and Adjasi (2007), Demirguc-kunt and Maksimov (1996) etc.

Below is a time series simple bar graph showing the movement in the ratio of transaction at

the Nigerian stock exchange.

78

FIGURE 4.2.4 RATIO OF TRANSACTION AT THE NIGERIAN STOCK

EXCHANGE FROM 1990-2012

Years

The ratio of transaction at the Nigerian stock exchange indicated that there existed

fluctuations in the trend within the period under study. It can be seen from figure 4.2.4 that it

trended high from 1990-1995 but trended low with the period 1996 and 2000. It gradually

trended up from 2001-2009. However, within 2010 and 2012, it witnessed fluctuations within

the periods.

4.2.5 DETERMINATION OF RATIO OF GROSS CAPITAL FORMATION FROM

1990-2012.

YEAR GFCF(In Million)

RGDP(In Million)

GFCF PER RGDP

1990 40,121.30 267550 149.96

1991 45,190.20 265379.1 170.29

1992 70,809.20 271365.5 260.94

1993 96,915.50 274833.3 352.63

1994 105,575.50 275450.6 383.28

1995 141,920.20 281407.4 504.32

1996 204,047.60 293745.4 694.64

1997 242,899.80 302022.5 804.24

1998 242,256.30 310890.1 779.24

1999 231,661.70 312183.5 742.07

2000 331,056.70 329178.7 1005.71

79

2001 372,135.70 356994.3 1042.41

2002 499,681.50 433203.5 1153.46

2003 865,876.50 477533 1813.23

2004 863,072.60 527576 1635.92

2005 804,400.80 561931.4 1431.49

2006 1,546,525.70 595821.6 2.6

2007 1,915,348.80 634251.1 3.02

2008 2,030,510.00 674889 3.01

2009 2,442,703.50 716949.7 3.41

2010 2,694,381.22 776,332.21 28.81

2011 2,807,067.53 834,161.83 29.72

2012 2,998,263.67 888,893.00 29.65

Sources: Tables 4.2.3 and 4.2.4

The variable; Gross Fixed Capital formation was used as a proxy to capture the investment

level in Nigeria. Gross Fixed Capital formation ratio was obtained by dividing the value of

Gross Fixed Capital formation by RGDP. Below is the bar chart of Gross Fixed Capital

formation Ratio

FIGURE 4.2.5 RATIO OF GROSS FIXED CAPITAL FORMATION FROM 1990-

2012

Years 4.3 Presentation of Results

This research work employed the use of multiple regression model based on Ordinary Least

Square (OLS) method.

80

Modeling LOG(RGDPCA) by OLS

Dependent Variable: LRGDPPCA

Method: Least Squares

Date: 12/09/14 Time: 06:11

Sample: 1990 2012

Included observations: 23 Variable Coefficient Std. Error t-Statistic Prob. C 6.952667 0.332413 20.91575 0.0000

MCAPR 9.34E-10 1.30E-09 0.721339 0.4795

LTNIR 0.088342 0.023802 3.711523 0.0015

LTNSR 0.030227 0.022254 1.358280 0.1903 R-squared 0.508567 Mean dependent var 8.154169

Adjusted R-squared 0.430972 S.D. dependent var 0.247562

S.E. of regression 0.186746 Akaike info criterion -0.361366

Sum squared resid 0.662606 Schwarz criterion -0.163889

Log likelihood 8.155712 Hannan-Quinn criter. -0.311701

F-statistic 6.554141 Durbin-Watson stat 0.469438

Prob(F-statistic) 0.003153

FIRST MODEL

LOG(RGDPCA) = + 6.953 + 9.340 LOG(MCAPR) + 0.088 LOG(TNIR) + 0.030

LOG(TNSR) T* = (20.91) (0.72) (3.71) (1.36) S.E = (0.33) (1.30) (0.02) (0.02) t0.025 = 2.093

F (3, 19) = 6.55

F0.05 = 3.13

R2

= 0.508567 DW = 0.47

SECOND MODEL

Dependent Variable: LGCFR

Method: Least Squares

Date: 12/09/14 Time: 06:41

Sample: 1990 2012

Included observations: 23 Variable Coefficient Std. Error t-Statistic Prob. C 13.33949 3.700180 3.605093 0.0019

LMCAPR 0.076995 0.188612 0.408217 0.6877

LTNIR -0.706234 0.270827 -2.607692 0.0173

LTNSR -0.191331 0.241980 -0.790688 0.4389 R-squared 0.290454 Mean dependent var 5.124548

81

Adjusted R-squared 0.178420 S.D. dependent var 2.249825

S.E. of regression 2.039265 Akaike info criterion 4.419826

Sum squared resid 79.01340 Schwarz criterion 4.617304

Log likelihood -46.82800 Hannan-Quinn criter. 4.469491

F-statistic 2.592559 Durbin-Watson stat 0.640696

Prob(F-statistic) 0.082737

LOG(GCFR) = + 13.34 + 0.077 LOG(MCAPR) - 0.706 LOG(TNIR) – 0.191

LOG(TNSR) T* = (3.61) (0.41) (-2.61) (-0.79) S.E = (3.700) (0.189) (0.271) (0.242) t0.025 = 2.093

F (3, 19) = 2.59

F0.05 = 3.13

R2

= 0.290454 DW = 0.64

4.4 Analysis of Results

4.4.1 First Model Analysis

The calculated t-value for the regression coefficient of LOG(MCAPR), LOG(TNIR) and

LOG(TNSR) are 0.72, 3.71 and 1.36 respectively. The tabulated t- value is 2.093. Since the

calculated t-value of LOG(TNIR) is greater than the tabulated t-value at 5% level of

significance; we conclude that its regression coefficient is statistically significant. However,

the regression coefficients of LOG(MCAPR) and LOG(TNSR) are statistically insignificant

because their calculated t-values (0.72) and (1.36) are less than the tabulated t-value (2.120).

The standard error test S(b1) = 1.30, S(b2) = 0.02 and S(b3) = 0.02 while b11/2 = 4.67, b2

1/2 =

0.05 and b31/2 = 0.015 . Since S(b1) < b1

1/2 and S(b2) < b21/2 , we conclude that their

coefficient estimates of S(b1) and S(b2) are statistically significant. However, S(b3) > b31/2,

the coefficient estimate of S(b3) is statistically insignificant. The F-calculated value is 6.55

while the F-tabulated value is 3.13 at 5% level of significance. Since the F-calculated value is

greater than the F-tabulated value, we conclude that the entire regression plane is statistical

significant. This means that the joint influence of the explanatory variables (MCAPR, TNIR,

and TNSR) on the dependent variable (RGDPCA) is statistically significant.

82

The computed coefficient of multiple determination (R2 = 0.508567) shows that 50.86% of

the total variations in the dependent variable (RGDPCA) is accounted for, by the variation in

the explanatory variables namely Market Capitalization Ratio (MCAPR), Total New Issues

Ratio (TNIR) and Transaction at the Nigerian Stock Exchange (TNS) while 49.14% of the

total variation in the dependent variable is attributable to the influence of other factors not

included in the regression model. The computed DW is 0.47. At 5% level of significance with

three explanatory variables and 23 observations, the tabulated DW for dL and du are 1.078

and 1.660 respectively. The value of DW is less than the lower limit. Therefore, we conclude

that there was presence of positive first order serial correlation.

4.4.2 Second Model Analysis

The calculated t-value for the regression coefficient of LOG(MCAPR), LOG(TNIR) and

LOG(TNSR) are 0.41, -2.61 and -0.79 respectively. The tabulated t- value is 2.093. Since the

absolute calculated t-values of LOG(MCAPR) and LOG(TNSR) are less than the tabulated t-

value at 5% level of significance; we conclude that their regression coefficients are

statistically insignificant. However, the absolute t-calculated value of LOG(TNIR) is greater

than the tabulated t-value at 5% level of significance, we conclude that its regression

coefficient is statistically significant. The standard error test S(b1) = 0.187, S(b2) = 0.271 and

S(b3) = 0.242 while b11/2 = -0.04, b2

1/2 = -0.35 and b31/2 = -0.09. Since S(b1) > b1

1/2 and S(b3)

> b31/2 , we conclude that their coefficient estimates of S(b1) and S(b3) are statistically

insignificant. However, S(b2) > b21/2, therefore its coefficient is statistically significant. The

F-calculated value is 2.59 while the F-tabulated value is 3.13 at 5% level of significance.

Since the F-calculated value is less than the F-tabulated value, we conclude that the

regression plane is statistical insignificant. This means that the joint influence of the

explanatory variables (MCAPR, TNIR, and TNSR) on the dependent variable (GCFR) is

statistically insignificant.

83

The computed coefficient of multiple determination (R2 = 0.290454) shows that 29.05% of

the total variations in the dependent variable (GCFR) is accounted for, by the variation in the

explanatory variables namely Market Capitalization Ratio (MCAPR), Total New Issues Ratio

(TNIR) and Transaction at the Nigerian Stock Exchange (TNS) while 70.95% of the total

variation in the dependent variable is attributable to the influence of other factors not

included in the regression model. The computed DW is 0.64. At 5% level of significance with

three explanatory variables and 23 observations, the tabulated DW for dL and du are 1.078

and 1.660 respectively. The value of DW is less than the lower limit. Therefore, we conclude

that there is presence of positive first order serial correlation.

4.5 Test of Hypothesis

The aims of the researcher concerning this project work are to appraise the impact of

capital market on the Nigerian economic growth, evaluate the causes of change in the

investment levels with respect to the Stock Market and to ascertain the movement of

transaction at the Nigerian Capital Market within the period 1990-2012. With respect to this,

the null hypotheses are stated as follows;

Hypothesis 1

H0: Capital market does not have significant impact on the Nigerian economic growth

F-test is employed in testing the hypothesis. If F-cal > F-tab, reject the null hypothesis

and conclude that the regression coefficient is statistically significant. Otherwise accept the

null hypothesis. Using 5% level of significance at 3 and 19 degrees of freedom, F-calculated

value is 6.55 while the F-tabulated value is 3.13. Since the calculated F-value is greater than

the tabulated F-value at 5% level of significance; we reject the null hypothesis and conclude

that capital market has significant impact on the Nigerian economic growth.

Hypothesis 2

Capital Market has not caused any significant change in the investment level in Nigeria.

84

Using 5% level of significance at 3 and 19 degrees of freedom, F-calculated value is 3.13

while the F-tabulated value is 2.59. Since the calculated F-value is less than the tabulated F-

value at 5% level of significance; we reject the alternate hypothesis and conclude that Capital

Market has not caused any significant change in the investment level in Nigeria.

In order to ascertain the movement of transaction at the Nigerian Capital Market within the

period 1990-2012.

Graphical analysis was used to test the movement of transaction at the Nigerian Capital

Market within the period, as the third objective demanded.

Years

May looking at the graph, there is upward movement of the transaction at the Nigerian

Capital Market within the period. However, it was observed there were fluctuations in the

trend. Observing the movement, the value of transactions at the Nigeria stock exchange

(TNS), the total new issues (TNI) and the market capitalization (MCAP) were considered in

85

the graph. Within 1990-2004, the movement was gradually trending up but had a swift and

significant upward movement within 2005-2007. Eventually, there came a downward

trending between 2008 and 2009. Within 2010 and 2012, there was rise, fall and rise trend

respectively.

4.6 Implication of the Results

The entire regression plane of the first model is statistically significant. This was

confirmed by the F-statistical value. Hence, capital market has significant impact on the

Nigerian economic growth within the period under study. The sign borne by the parameter

estimates are positive. This implies that there is positive relationship between real GDP per

Capita and the explanatory variables; the market capitalization (MCAP), the total new issues

(TNI) and the value of transactions at the Nigeria stock exchange (TNS). It is estimated from

their ratios in the model that 1% increase in MCAP will result to increase in RGDPCA by

9.3% on the average while 1% increase TNI and TNS, on the average, will result to increase

in RGDPCA by 0.01% and 0.03% respectively. However, it is observed that Real GDP Per

Capita (RGDPCA) will increase by 6.9% on the average should the explanatory variables are

held constant.

The Capital Market has not caused any significant change in the investment level in

Nigeria. This is confirmed by the F-statistical value which its probability depicts no

significance in the model. The computed coefficient of multiple determination shows that

29.05% of the total variations in the dependent variable (GCFR) is accounted for, by the

variation in the explanatory variables namely Market Capitalization Ratio (MCAPR), Total

New Issues Ratio (TNIR) and the Ratio of Transaction at the Nigerian Stock Exchange

(TNSR) while 70.95% of the total variation in the dependent variable is attributable to the

influence of other factors not included in the regression model. This output from the value of

R2 implies that there is no good fit in the regression model. There are negative relationship

86

between Ratios of Gross Capital Formation (GCFR) and the explanatory variables namely

Total New Issues Ratio (TNIR) and Transaction at the Nigerian Stock Exchange (TNS).

Thus, investment has not been promoted by the stock market in Nigeria within the period

under study. This result can be justified by non-challant attitude of Nigerians towards the

stock market transactions and also their ignorance about the market and investment ventures.

There is now no gainsaying that there are fluctuations in the upward movement of the

transaction at the Nigerian Capital Market within the period. Observing the movement, the

value of transactions at the Nigeria stock exchange (TNS), the total new issues (TNI) and the

market capitalization (MCAP) was viewed from the graph. Within 1990-2004, the movement

was gradually trending up but had a swift and significant upward movement within 2005-

2007. Eventually, there came a downward trending between 2008 and 2009. However, within

2010 and 2012, there were fluctuations in MCAP. Thus, these fluctuations in the movement

of the transaction can be attributed to the behaviours of Nigerians and the stock market

activities.

87

CHAPTER FIVE

5.0 SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATION

This chapter seeks to summarize the various research findings resulting from the

study which were made in line with the specified objectives of the research study. However,

conclusions and the needed recommendations were subsequently made in the light of the

research findings.

5.1 Summary of Research Findings

The findings were made in line with the stated objectives of the study. The major findings of

this research were discussed as follows:

OBJECTIVE ONE

To appraise the impact of capital market on the Nigerian economic growth

The entire regression plane of the first regression model is statistically significant. This was

confirmed by the F-statistical value. This result confirmed that this objective has been met.

Hence, capital market has significant impact on the Nigerian economic growth within the

period under study. The test is in conformity with the findings of Levine and Zervos (1996),

Demirque-Kunt and Zervos (1996), Rousseau and Sylla (2005) etc. However, it contradicts

the earlier negative of Singh (1997), Bhide (1994) and Binswanger (1999) which argue that

stock market development generates noise trading and hurts economic growth in the long run.

OBJECTIVE TWO

To examine the effect of Capital Market in the significant change of investment level in

Nigeria

As can be seen from the regression result, objective two is also met. The regression

output shows that Capital Market has not caused any significant change in the investment

88

level in Nigeria. This is confirmed by the F-statistical value which its probability depicts no

significance in the model. There are negative relationship between Gross Capital Formation

ratios (GFCR) and the explanatory variables namely Market Capitalization Ratio (MCAPR),

Total New Issues Ratio (TNIR) and Transaction at the Nigerian Stock Exchange (TNS).

Thus, investment has not been promoted by the capital market in Nigeria within the period

under study. The study found support for the proposition as there are non-challant attitude of

Nigerians towards the Capital market transactions and also their ignorance in the market and

investment opportunities. This research finding is in line with the works of Singh (1971) and

Binswanger (1999) who stated that capital market has not improved the investment

propensities of the developing nations. However, this finding is not in consonance with the

works of Tamura (2003), Campos (2000), Balaban (1995) Buelens and Cuyvers (2005) etc.

who found that improvement in stock trading which was stimulated by the adoption of

electronic trading systems will boost the investment level and contribute to the economic

growth.

89

OBJECTIVE THREE

To ascertain the movement of transaction at the Nigerian Capital Market within the

period 1990-2012

In the light of the graphical presentation, the third objective of the research study was

met. Although there was upward movement of the transaction at the Nigerian Capital Market

within the period, there were also fluctuations in the trend. Observing the movement, the

value of transactions at the Nigeria stock exchange (TNS), the total new issues (TNI) and the

market capitalization (MCAP) were considered in the graph. Within 1990-2004, the

movement was gradually trending up but had a swift and significant upward movement

within 2005-2007. Eventually, there came a downward trending between 2008 and 2009.

These fluctuations in the movement of the transaction are attributed to the behaviours of

Nigerians and the stock market activities. This research finding can be likened to the works of

Yartey (2006), Blair (2000) and Makismovie (1996) who found that higher productivity

resulting from higher transaction in the stock market culminates to the upward trend in the

market and its downwards slope is a function of exogenous variables.

5.2 Conclusion

There is strong mind to answer boldly, if these questions are thrown: Does capital

market have significant impact on Nigerian economic growth? Has capital market caused any

significant difference on the domestic investment in Nigeria? What is the trend of transaction

at the Nigerian Capital Market which comprises of market capitalization, total new issues etc.

This study used multiple time series ordinary least square regression to evaluate the

relationship between capital market and economic growth. The reliability for adopting this

analytical technique was based on the optimal properties such as linearity (Gujarati 2004).

In conclusion of the study, the most promising route for the economy is outward-

oriented-strategy or capital market-led-growth. Aside from other advantages such as rapid

90

growth rate, increased and sustained growth rate of the value of transaction at stock exchange

market had dynamic effects in the economies and did not merely produce static gains from

improved activities; it would enable the country to realize the fruit of international

partnership.

Fortunately, our capital market has provided the needed base for long term trading of

securities. What is therefore required is a deliberate effort by both government and private

sector to incorporate the critical measure that will boost the activities of the capital market for

the growth of the economy.

In addition, if all the recommendations based on our analysis are implemented our

country will experience a high growth in the economy.

5.3 Recommendations

In the light of the researcher’s findings, the following recommendations are presented;

• The capital market should provide a meaningful orientation about the operations and

mechanisms of the market to the interested public.

• The government through its appropriate agencies should encourage the development and

participation in the market by a meaningful media campaign (radio and television).

• Intensive overseas partnership programs for qualified capital market professionals should

be offered after completion of the introductory training program in capital market issues.

These partnership programs would involve on the job training in stock exchanges,

regulatory bodies, depositories and bond issuer agencies in Nigeria.

• In our national capital market the brokerage services is so poor that the few investors who

are capable and willing to invest find it very difficult to participate. The government

should make sure that the brokerage services are improved on, so that the willingness of

the investors shall be enhanced.

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• The financial account of the capital market should be made open to the public.

• Disclosure of financial positions of the listed companies should be published regularly in

newspapers.

• The market trends of listed companies should be published regularly.

• Involvement of indigenous investors should be encouraged in the capital market.

5.4 Recommended Areas for Further Research

The findings of this research study have opened up other areas of research that will aid the

understanding of capital market and economic growth in Nigeria.

• The study appraises the impact of capital market on the Nigerian economic growth. Thus

further research should revolve around the evaluation of the impact of capital market on a

specific aspect of the economy like the agricultural sector or industrial sector.

• The researcher recommended that involvement of indigenous investors should be

encouraged in the capital market but failed to suggest possible ways of involving

indigenous investors. Further research could focus on ways of involving indigenous

investors in the capital market as it will help to promote the local investment in the

economy.

• In the model specified, the researcher estimated with the help of ordinary least square

method of the regression analysis in which the F-statistics were used in the statistical

approach. Further tests like granger causality tests and co-integration test can as well be

used in the next research work to find out pair wise relationship between the dependent

variable and the explanatory variables. To find the long-run relationship in the estimation

Johansen Cointegration can be applied for further studies.

5.5 Contribution to Knowledge

92

This research work made two major contributions to knowledge;

• The results of this study showed empirical evidence on the impact of capital market on

Nigeria. The results improve our understanding and appreciation of the capital market in

the growth of the economy.

• With respect to investment, the researcher threw more light on the relationship which

existed in line with capital market activities. More knowledge is acquired in the light of

the study.

93

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