THE ROLE OF STOCK MARKET IN THE GROWTH OF NIGERIAN ECONOMY (1980-2010)

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Stock Market is viewed as a medium to encourage savings, help channel savings into productive investment, and improve the efficient and productivity of investment. The emphasis on the growth of stock markets for domestics‘ resource mobilization has also been strengthened by the need to attract foreign capital in non-debt creating forms. A viable equity market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises are in a privileged position because they can make investment from retained earnings and bank borrowings, while new companies do not have easy access to finance. Without being subjected to the scrutiny of the stock market, big firms get bigger, and for the emerging smaller companies, retained earnings and fresh cash injectionsfrom the controlling shareholders may not be able to keep pace with the needs for more equity financing which only an organized market place could provide. The corporate sector would also be strengthened by the requirements of equity markets for the development of widely acceptable accounting standards, disclosure of regular, adequate, and reliable information. While closely held companies can camouflage poor investment decisions and low profitability, at least for a while, public held companies cannot afford this luxury. The availability of reliable information would help investors make compares‘ of the performance and long term prospects of companies; corporations to make better investment and strategic decisions; and provide better statistics for economic policy makers.Success in capital accumulation and mobilization for development varies among nations, but it is largely dependent on domestic savings and inflows of foreign capital. Therefore, to arrest the menace of the current economic downturn, effort must be geared towards effective resource mobilization. It is in realization of this that consideration is given to measure the development of capital market as an institution for the mobilization of finance from the surplus sectors to the deficit sectors. Levine (1991) showed a positive relation between financial stock market and economic growth by issuing new financial resources to the firms. The financial stock market facilitates higher investments and the allocation of capital, and indirectly the economic growth. Sometimes investors avoid investing directly to the companies because they cannot easily withdraw their money whenever they want. But through the financial stock market, they can buy and sell stocks quickly with more independence. An efficient stock market contributes to attract more investment by financing productive projects that lead to economic growth, mobilize domestic savings, allocate capital efficiently, reduce risk by diversifying, and facilitate exchange of goods and services (Mishkin 2001; and Caporale et al, 2004).

1.2 Statement of the Problem

There is abundant evidence that most Nigerian businesses lack medium and long –term capital. The business sector has depended mainly on short-term financing such as overdrafts to finance even long-term investment. Based on the maturity matching concept, such financing is risky. All such firms need to raise an appropriate mix of short- and long-term capital (Demirguc-Kunt and Levine 1996). Most recent literatures on the Nigeria Capital Market have recognized the tremendous performance the market has recoded in recent times. However, the vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in the Nigerian economic growth and development. Aside the social and institutional factors inhibiting the process of economic development in Nigeria, the bottleneck created by the deficiency of finance to the economy constitutes amajor setback to its development. As a result, it is necessary to evaluate the Nigerian capital market.

1.3 Research Questions

In the light of the research problems, this study attempts to answer the following:1. Does stock market have a significant effect on economic growth?2. Does investment have a significant effect on GDP?3. What is the causality between stock market and economic growth?

1.4 Objectives of the Study

The broad objective of this study is to examine the role that the stock market plays in the growth process of the Nigerian economy.However, the specific objectives are as follow:1. To determine the nature of relationship between stock market and economic growth.2. To examine the determinants of investment in the stock market.3. To determine the causality between stock market and economic growth.

1.5 Hypotheses of the Study

1. Ho: That the capital market has a negative relationship with economic growth.2. Ho: portfolio Investment in Nigeria is not a determinant of economic growth.3. Ho: There is no causal relationship between stock market and economic growths.

1.6 Significance of the Study

The study will explore the effectiveness of capital market instruments on Nigerian economic growth. Though the scope of study will be limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy recommendations to policy – makers on ways to improve operations and activities of the capital market.

1.7 Scope of the Study

The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the financial sector). This work will not cover all the facts that make up the financial sector, but shall focus only on the capital market and it role as it impacts on the Nigerian economic growth. The empirical investigation of the role of the capital market on the economic growth in Nigeria shall be restricted to the period between 1980 and 2010 a period of thirty (30) years.