the impact of capital

Rjopes Research Journal in Organizational Psychology & Educational Studies 2(5) 267-270 Rjopes © Emerging Academy Resources (2013) (ISSN: 2276-8475)

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THE IMPACT OF CAPITAL MARKET IN THE DEVELOPMENT OF NIGERIA

ECONOMY

Roseline Oluitan and Anne U. Henry Department of Accounting Finance,

Lagos State University, Lagos, Nigeria. Corresponding Author: Roseline Oluitan __________________________________________________________________________________________ ABSTRACT The importance of the capital market as a vehicle for growth is well known in the literature. However, it is argued that under-developed economies may not experience the expected growth due to the poor deepening of the market. The paper examines the importance of capital market to the development of the Nigerian economy. The study is apt as it evaluates the importance of the capital market in the provision of the much needed long-term funds for the industries to stimulate growth that assists the government to meet its developmental goals within the economy. It conducts a multiple regression and uses market variables that are considered very crucial to the survival of the market. Data used covers 1992 to 2010. The result supports existing literature about the importance of capital market on the economy and provides better insight into the activities of the market. It also suggests that all aspects of the market included in the study are essential ingredients for the growth of the Nigerian economy.

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KEYWORDS: Capital Market, Development, Nigeria. _________________________________________________________________________________________ INTRODUCTION Capital market is recognized as a viable and efficient tool for the growth of the economy. Many economies now appreciate the market as a major source for long-term finance hence adopt policies that will enhance the activities of the capital market to assist in the fruition of the laudable goals. This process is described by Adelegan, 2001 as “capital market reform”. Capital market is a collection of financial institutions set up for the granting of medium and long term loans. It is a market for government. In this market, lenders (investors) provide long term funds in exchange for long term financial assets offered by borrowers. The market encompasses both new issues (primary) market and secondary market. Such securities might be raised in an organized market such as the Stock Exchange. In the Nigerian context, participant includes Nigerian Stock Exchange, Discount Houses, Development banks, Investment banks, Building societies, Stock Broking firms, Insurance and Pension Organizations, Quoted companies, the government, individuals and the Nigerian Stock Exchange Commission (NSEC). The capital market is therefore very important to any economy because, it encourages long-term savings which are channeled into real investment with a view to increase capital stock.

The study attempts to examine the importance of the capital market in the provision of long-term funds that stimulates growth through a multiple regression analysis for a period that covers 1992 to 2010 (nineteen years only due to non-availability of data). The result suggests a very significant impact of the market on the development of the economy and also proffers recommendations that will make the market more relevant to the economy. LITERATURE REVIEW Financing the saving investment gap especially in the less development economy where saving mobilization could not keep pace with the level of investment has necessitated the need for encourage foreign capital inflow in order to bridge the gap and thus promote economic growth. Many development economists consider investment as the most important factor in the growth process. Even the World Bank (2009) acknowledged that economic growth without a well developed domestic financial market would be detrimental to the long run growth prospects of developing countries. Oni (1998) argues that the capital market is an engine of economic growth. Following the same line of argument is Claessens and Leaven (2006) who state that there is a close correlation between per capita income and the capital market while Demirguc-Kunt & Levine (1996) contend that the level of stock market development does a good job in predicting the future economic growth.

Research Journal in Organizational Psychology and Educational Studies (ISSN: 2276-8475) 2(5):267-270

The Impact Of Capital Market In The Development Of Nigeria Economy

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There is a general consensus in the literature that the Nigerian Capital Market is capable of contributing significantly to the growth of the economy. Various researchers support the development capacity of the market, though at varying degrees of performance. Akinlo (2008) stated that the Nigerian Stock Exchange has continued to witness significant growth especially after the deregulation and the financial sector reformation 1986. Copeland & Weston (1988) held that the capital market institution in particular are in position to encourage investment, as investors are able to borrow fund and invest more than they would have done without institutions. According to Osaze (1997), the Nigerian Capital Market is a fulcrum upon which the economy depends and equally serves as an indicator of economy liquidity and general performance. This view is similar to that of Oginni (1992), who opines that the stock market exists purposely to serve as a vehicle for the mobilization of funds. Likewise, Dozie (1998) says the Nigerian Capital Market is a citadel of which financial services rendered are capable of stimulating the economy. Dimirguc-Kunt and Maksimovic (1996) opined that the stock market serves as an important function even for those economies in which a well developed banking stock already exists. He explained that equity and debt financing are not perfect substitute. Equity finance according to them has a key role in the management conflict of interest that they may arise among stockholders in the firm. Several researchers including Johnson et al (2009) consider capital accumulation as the distinguishing characteristics of development and the situational transformation of capital accumulation. This view supports the importance of the capital market as agent for growth hence Patrick and Wei (2003), emphasized the need for keep examination on the performance and structure of capital market. According to the study, developing economies should be more inclined to it because it is opined that it will serve as a profitable link of research centre in determining their appreciable influence on the growth of an economy. In further support of the argument, Dougall and Gaumnitz (1975) discussed the need for the existence of capital market as a vehicle for transfer of funds. They postulate that a functional capital market aids the transfer of funds from the surplus spending unit to the deficit spending unit. Osaze (1997) states that companies readily seek for funds for the establishment and expansion of their business from the capital market. This, over time, has proven to be the cheapest source of funds. Similarly, Adedipe and Bello (2005) emphasizes the role of capital market in the mobilization of capital

for economic development while Alile & Anao (1986) opines that the operational rules and procedures of the capital market are geared solely to the facilitation of the capital mobilization process. It is therefore not surprising when Levine (2001) suggested that liquidity risk can be managed directly through the setting up of a stock market. The Capital Market is a market that provides facilities for mobilizing and dealings in medium and long term funds and equity. Due to the nature of funds that could be sourced from this market, it is argued that it is a potent source of development as earlier mentioned. Nigeria attempted to pursue this objective with the establishment of the Securities and Exchange Commission in 1979 through the Securities and Exchange Commission Decree. The opinion postulated by Oladeji (1992), sees the market as a viable option for capital formation and suggests that more companies now use the market facilities to strengthening their balance sheet. This statement suggests increased importance of the market for companies in the country. According to Akinlo (2008), the Nigerian Stock Exchange has continued to witness significant growth especially after the deregulation and financial sector reform in 1986. The plot of the available data on the ratio of market capitalization to gross domestic product shows a steady and smooth upward sloping trend. However the ratio of market capitalization to Gross Domestic Product rose sharply as from 1994 and only decelerated in 1998 and 1999. The ratio again picked up in 2000 and attained its peak of 34.6% in 2006. The paper supports the view of Dimirguc-Kunt and Maksimovic that the initial improvement in the functioning of a developing market produces a high debt equity ratio for firm and also provides more business for the banks. RESEARCH METHODOLOGY The study focuses on findings out the impact of capital market on the development of Nigerian economy. It examines the effect of the capital market to exert positive impact on the growth of the economy. Historical data is used. Gross Domestic Product is used as the proxy for economic growth while variables that are germane to the activities of the stock market are used to determine the market impact on the economy. Data used is obtained from the Federal Office of Statistics (FOS) and Central Bank of Nigeria (CBN) research and development department. However, the bulk of the information used was gotten from the Central Bank of Nigeria (CBN) statistical bulletin.



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ANALYTICAL TECHNIQUE The procedure involves estimating the impact of the capital market on the economy with a view to assess the performance of the stock market on investment. The research will use multiple linear regression analysis to establish the relationship. The following variables are used to assess the effectiveness of the stock market; Market capitalization which refers to the total market value of the equity in the publicly traded entity. It also refers to the value of all listed securities base on their market prices; Number of listed securities which measures the total number of corporate bodies that have issued shares to the investing public; duly approved by the Securities and Exchange Commission and traded on the floor of the Stock Exchange; Number of deals which refers to the total transaction that took place in the Capital Market at a given period; and Value of transaction which is defined as the price of each transaction by the total value of shares traded over a particular time. MODEL SPECIFICATION In specifying the model adopted for this study, the research is guided by the theoretical considerations on the area of study, several empirical surveys carried out on this subject in the country as well as the peculiarities of the Nigerian economy during the scope of the study (1992 to 2010). The model to be tested is GDPt = β0+ β1 MACPt+ β2 VOTt + β3 NODt+ β4NOLt + ut Where, GDPt = Gross domestic product; MCAPt = Market Capitalization NOLt = Number of listing; VOTt =Value of transaction; NODt = Number of deals β0= intercept; ut = Error term; t after each variable is the time subscript. ANALYSIS AND INTERPRETATION As earlier stated, the quantitative employed in analyzing the data obtained is linear regression. This is straight line equations that describe the relationship between the dependent and independent variables of any data. The multiple linear regression analysis was employed using the Ordinary Least Square (OLS) method to estimate the linear relationship between investment and gross domestic product which is the proxy for economic growth. The OLS method is used in this study because of it simple approach, non excessive data requirement and also because the method is very popular in estimating linear relationship in econometric models and capable of providing fairly satisfactory results. The regression result is presented below.

Regression Result for the effect of Capital Market on Economic Development

Variable Coefficient Std.Error t-Statistic Prob.

C 6.920895 6.291764 1.320916 0.2063 MC 7.587651 0.042161 13.76534 0.0000 NOL 9.342173 0.044326 14.86493 0.0100 VOT 18.96786 0.032568 15.95437 0.0000 NOD 11.98645 0.065333 16.03768 0.0300 R-squared 0.868609 mean dependent var 88.57647 Adjusted R-squared 0.990572 S.D dependent var 63.83604 S.E of regression 15.56182 Akaike info criterion 8.437649 Sum squared resid 3632.552 Schwarz criterion 8.535674 Log likelihood -69.72001 Hannan-Quinn criter. 8.447393 F-Statistic 254.2348 Durbin-Wastson stat. 2.194480 Prob(F-Statistic) 0.000000

Interpretation of Result The result shows that all the explanatory variables are positively correlated to the dependant variable with the level of significance ranging from 1% to 5%. The only exception is the intercept which is not significant. Similarly, the coefficients for these variables are large; this further buttresses high impact of the explanatory variables. Specifically, the result shows that a unit change in each of the explanatory variables will lead to over 7.58 units change for market capitalization; over 9.34 units change for number of listings; over 18.96units change for value of transaction and over 11.98 units change for number of deals on the proxy for development. Similarly, the R2 and Adjusted R2 are 0.87 and 0.99 respectively which determines the ability of the explanatory variables to explain the dependent variable. The power of the regression is equally high and suggests that the model is well specified. In summary, the explanatory variables are very good instruments for the development of the Nigerian economy. CONCLUSION AND RECOMMENDATIONS This paper examines the impact of capital market on the development of the Nigerian economy. In carrying out this research the researcher was able to discuss on the topic by highlighting on concepts of capital market and corporate finance; the consequences of raise equity capital through the capital market; importance of the topic to the list companies, unlisted companies, capital market operator, the Nigerian economy and students from other higher institutions of learning are being indicate research questions and hypothesis were drafted for further information to be derived and tested. The researcher went further to discuss the literature review aspect of the research in carrying out this research, the concept of capital market in totality from relevant textbooks and journals were being highlighted, capital market in relation to listed



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companies and how it influences corporate governance, some studies of earlier researchers on capital market and development were all being stated and how it affect the economy as a whole. Finally, it could be inferred that the market variables are important vehicles for the growth of the Nigerian economy. However, for the market to ensure appropriate impact, efforts should be made to encourage or increase volatility in the Nigerian capital market. Similarly, the problems of microeconomic instability should be addressed through appreciate policy measure that will strengthen the institutional regulatory framework. There is need to encourage more enterprises to come into the market so as to expand their activities and deepen the operations of the market. This can be achieved through a review of the cost of borrowing from the market. The high cost of raising funds on the market has been recognized as one of the factors militating against the growth of the Nigeria capital market. There is the need to pursue economic and financial policies that will encourage investment in the capital market. In this respect, monetary policies should be designed in such a way that savings are encouraged for investment. Small and medium scale enterprises should be encouraged through various tax incentives and reduced listing requirements to enter the market. Such policies have been used in other countries with positive result. The government should educate the populace on the importance of being abreast with the activities of the market. This will prevent the attitude of buy and hold syndrome that currently affect Nigerians. The problems of provision of infrastructural facilities should be given increased attention by the government. Many businesses are groaning due to heavy outlay on funding electricity and other facilities and it is known that many businesses refuse to come to the country or start their businesses due to these challenges. This will assist to improve the low depth of the market, because foreign businesses will be happy to invest in the market. There is need for some policies that will internationalize the capital market and allow for the listing of foreign currency denominated securities on the stock exchange.

REFERENCES Adedipe, D., Bello, S. (2005) Finance Stock Market Development and Economic Growth in Nigeria; Nigerian Journal of Security. Adelegan, O. (2001) The Role of Operator in Security Market Development in Nigeria: The Nigerian Experience; The Bullion Vol. 16, No.4.

Akinlo, E. (2008). Stock Market Development and Economic Growth in Nigeria; Nigerian Journal of Security and Finance Alile, H. & Anao, A. (1986) The Nigerian Stock Market in Operation. Jeromelaiho and Associate Limited, Lagos. Claessens, S. & Laeven, L. (2006) A Reader in International Corporate Finance. The World Bank, Washington. Copeland, T. & Weston, J. (1988) Financial Theory and Corporate Finance. Addison-Wesley Publishing Company, Inc. Demirguc-Kunt, A. & Levine, R. (1996) Stock Markets, Corporate Finance and Economic Growth: Overview; World Bank Economic Review, Vol. 10, No. 2. Demirguc-Kunt, A. & Maksimovic, V. (1996) "Stock Market Development and Finance Choices of Firms" The World Economic Review Vol. 10. No. 2, pages 341 – 369. Dougall, H. E., & Gaumnitz, J. E. (1975) Capital Market and Institutions. Prentice Hall Inc., Eglewood Cliffs, New Jersey. Dozie, S. (1998). Money, Banking and Financial Market. Pearson International, USA. Johnson, J., Schnytzer, A. & Liu, S. (2009) To What Extent Do Investors in a Financial Market Anchor Their Judgements? Evidence from the Hong Kong Horserace Betting Market. Journal of Behavioural Decision Making, Vol. 22, No. 4, pp 410-434. Levine, R. (2001). "Stock Market Development and Long run Growth". The World Bank Economic Review. Ogini, N. (1992), Importance of Capital Formulation in Underdeveloped Countries, Oxford University Press, New York. Oladeji, P. (1992). Introduction to security market Analysis and Portfolio Management; Limbs Press, Lagos. Oni, S. (1998) Relevance of the Nigerian Stock Exchange to the Economy; Unilag Symposium, Lagos. Osaze, E. (1997). Capital Markets: Africa and Global; The Bookhouse Company, Lagos. Patrick, N., & Wei, P. (2003) Money and Capital Market; USA McGraw Hill Higher Education.

the impact of capital

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