ABSTRACT
This study sought to examine the impact
of Nigeria’s economic growth on the Nigerian capital market by investigating
the impact of economic growth on the Nigerian Stock Exchange market
capitalization ratio; impact of economic growth on the Nigerian Stock Exchange
turnover ratio; impact of economic growth on the Nigerian Stock Exchange value
traded ratio; impact of economic growth on new issues in the Nigerian Stock
Exchange; impact of economic growth on the number of listings in the Nigerian
Stock Exchange and causal relationship between economic growth and capital
market growth indicators in Nigeria. The ex-post
facto research design was used and time series data for the 15-year period,
1996-2010, were collated from the Central Bank of Nigeria Statistical Bulletins,
the Securities and Exchange Commission Statistical Bulletin and the Nigerian
Stock Exchange Factbooks. The two-stage least squares (2SLS) regression model
was used to estimate the impact of economic growth on conglomerate indices of
the Nigerian Stock Exchange for hypotheses one to five while the Granger
causality f-statistics was used to
test hypothesis six. Values of Stock Market Capitalization Ratio (SMCR), Stock
Market Turnover Ratio (SMTR), Stock Market Value Traded Ratio (SMVTR), Stock
Market New Issues Ratio (SMNIR) and Stock Market Number of Listings (NSM) were
used as proxies for capital market development and adopted as the dependent
variables, while the independent variable was the Gross Domestic Product Growth
Rate (GDPGR), used as proxy for economic growth. Six hypotheses were considered
and descriptive statistics on both the dependent and independent variables were
computed. The study found, among others, that economic growth has a positive
and non-significant impact on the market capitalization ratio of the Nigerian
Stock Exchange (coefficient of SMCR=0.42, t-value = 1.19). Economic growth has a positive and significant
impact on the Nigerian stock market turnover ratio (coefficient of SMTR= 0.17,
t-value = 29.21). Economic growth has a positive and non-significant impact on
the Nigerian stock market value traded ratio (coefficient of SMVTR= 0.00,
t-value = 1.66). Economic growth has a positive and non-significant impact on
the new issues ratio of the Nigerian stock exchange (coefficient of NIR = 0.00,
t-value = 0.03). Economic growth has a negative and non-significant impact on
the number of listings in the Nigerian stock market (coefficient of NSM =
-0.00, t-value = -0.70). Economic growth
and all capital market growth indicators employed do not Granger-cause each
other. However, the various capital market growth indicators used Granger-cause
each other, and, thus, bi-directional, except for the unidirectional causality
running from the Nigerian stock market turnover ratio to the value traded
ratio. The study, therefore, recommends, amongst others, that government
provides the enabling environment for the economy to thrive in order for the
Nigerian capital market to achieve the desired world-class status and compete
favourably in international capital markets, the strengthening of legislative
and regulatory framework governing the capital market in Nigeria to conform to the
legislative and regulatory standards of advanced capital markets. These will
increase the confidence of local and foreign investors to patronize the market
and save through the mechanism which the market provides. The channeling of
these savings into productive investments will further engender the country’s economic
growth and development.
TABLE OF CONTENTS
Title Page . . . . . . . i
Approval Page . . . . . . . . ii
Certification Page . . . . . . . iii
Dedication iv
Acknowledgements . . . . . . . v
Abstract . . . . . . . vi
Graph/List of Tables . . . . . . . . x
List of Appendices .. . . . . . . x
CHAPTER ONE INTRODUCTION
1.1 Background of the Study. . . . . . . 1
1.2 Statement of the Problem . . . . . 4
1.3 Objectives of the Study. . . . . . . 7
1.4 Research Questions. . . . . . . . 7
1.5 Research Hypotheses. . . . . . . 8
1.6 Scope of the Study. . . . . . . 8
1.7 Significance of the Study. . . . . . 9
1.8 Limitations of the Study . . . . . 10 References. . . . . . . . . 11
CHAPTER
TWO REVIEW OF RELATED LITERATURE
2.1 Theoretical Review . . . . . 15
2.1.1 Capital Market Development and Economic Growth.. 15
2.1.2 Capital Market Performance and Economic Growth. 21
2.1.3 Financial Development and Deepening . . 22
2.1.4 Financial Development and Economic Growth. . . 23
2.1.5 Finance and Growth Paradigm. . . . . 26
2.1.6 Theoretical Basis for Capital Market Development
and Economic Growth. . 29
2.1.7 Financial Liberalization and Economic Growth. . . 32
2.1.8 Financial Liberalisation, Savings and Investment. . . 36
2.1.9 Financial Liberalisation and Economic Instability. . 39
2.1.10 Foreign Investments and Capital Market Development in Nigeria 44
2.1.11 Overview of the Nigerian Capital Market. . 46
2.2 Empirical Review . . . . . 52
2.2.1 Capital Market Development and Economic Growth . 52
2.2.2 Capital Market Performance and Economic Growth . 54
2.2.3 Foreign Investments, Capital Market
Development and Economic Growth . 55
References. . . . . . . . . 57
CHAPTER THREE RESEARCH METHODOLOGY
3.1 Research Design. . . . . . . . 71
3.2 Nature and Sources of Data. . . . . . 71
3.3 Model Specification. . . . . . . 71
3.4 Model Justification. . . . . . . . 73
3.5 Explanatory Variables. . . . . 73
3.5.1 Gross Domestic Product Growth Rate. . . . 73
3.5.2 Stock Market Capitalization Ratio. . . . 73
3.5.3 Stock Market Turnover Ratio. . . . 74
3.5.4 Stock Market Value Traded Ratio. . . . . 74
3.5.5 New Issues Ratio . . . . . 74
3.5.6 Stock Market Number of Listings. . . . . 75
3.6 Techniques of Analysis. . . . . 75
References. . . . . . . . 77
CHAPTER
FOUR PRESENTATION AND
ANALYSIS OF DATA
4.1 Introduction. . . . . . . . 79
4.2 Presentation of Data. . . . . . . 79
4.3 Test of Hypotheses. . . . . . . . 87
4.3.1 Test of Hypothesis One. . . . . . . 87
4.3.2 Test of Hypothesis Two. . . . . . 89
4.3.3 Test of Hypothesis Three. . . . . . 91
4.3.4 Test of Hypothesis Four. . . . . . 93
4.3.5 Test of Hypothesis Five. . . . . . . 95
4.3.6 Test of Hypothesis Six . . . . . 97
4.4 Comparison of the Findings with the Objectives of the Study .. 102
4.4.1 Research Objective One . . . . . 102
4.4.2 Research Objective Two . . . . . . 102
4.4.3 Research Objective Three . . . . 102
4.4.4 Research Objective Four . . . . . . 103
4.4.5 Research Objective Five . . . . . . 104
4.4.6 Research Objective Six . . . . . 104
References . . 105
CHAPTER FIVE : SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings . . . . . 107
5.2 Conclusion . . . . . . 108
5.3 Recommendations 109
5.3.1 Recommendations for Further Studies . . . 111
5.3.2 Contribution to Knowledge . . . . 111
References 113
Appendices 114
Bibliography . . 118
List of Tables
Table 4.1 Quantum Values of Model Proxies . . . 79
Table 4.2 Computed Model Ratio Proxies . . . 80
Table 4.3 Two-Stage Least Squares Results of Hypothesis One 88
Table 4.4 Correlation Results of Hypothesis One 89
Table 4.5 Two-Stage Least Squares Results of Hypothesis Two 90
Table 4.6 Correlation Results of Hypothesis Two 91
Table 4.7 Two-Stage Least Squares Results of Hypothesis Three 92
Table 4.8 Correlation Results of Hypothesis Three . . 93
Table 4.9 Two-Stage Least Squares Results of Hypothesis Four 94
Table 4.10 Correlation Results of Hypothesis Four . . 94
Table 4.11 Two-Stage Least Squares Results of Hypothesis Five 95
Table 4.12 Correlation Results of Hypothesis Five . 96
Table 4.13 Pairwise Granger Causality Tests lagged 2 . 97
List of Figures
Fig.
4 Graph of Representation of
Model Proxies for the period 1996-2010 . 80
List of Appendices
Appendix I Quantum Values of Model Proxies . . . 114
Appendix II Extract of Model Proxy Data . . . 115
Appendix III Results of Regression Analysis . . . 116
CHAPTER ONE
INTRODUCTION
- Background of the Study
According to Al-Faki (2006),
the capital market is a “network of specialized financial institutions, series
of mechanisms, processes and infrastructure that, in various ways, facilitate
the bringing together of suppliers and users of medium- to long- term capital
for investment in socio-economic developmental projects”. The capital market is
divided into the primary and the secondary market. The primary market, or the
new issues market, provides the avenue through which government and corporate
bodies raise fresh funds through the issuance of securities that are subscribed
to by the general public or a selected group of investors. The secondary market
provides an avenue for the sale and purchase of existing securities.
A large pool of theoretical evidence exists locally and
internationally showing that capital market growth boosts economic growth. Carlin
and Mayer (2003) show that the capital market impacts economic growth, though
not as strongly as the banking sector. Greenwood and Smith (1997) show that
large stock markets can decrease the cost of mobilizing savings, thus
facilitating investment in most productive technologies. Levine (1991) and
Bencivenga, et al(1996) argue that stock market liquidity, which is the
ability to trade equity easily and cheaply, is crucial for growth. Many
profitable investments require a long-run commitment of capital but savers are
reluctant to relinquish control of their savings for long periods. Liquid equity
markets address this challenge by providing assets which savers can sell
quickly and cheaply. Simultaneously, firms have permanent access to capital
raised through equity issues. Kyle (1984) and Holmstrom and Tirole (1993) argue
that liquid stock markets can increase incentives for investors to get
information about firms and improve corporate governance while Obstfeld (1994)
shows that international risk-sharing, through internationally integrated stock
markets, improves resource allocation and can accelerate the rate of economic growth.
These arguments on the importance of stock market development in
the growth process are supported by various empirical studies, such as Levine
and Zervos (1993, 1996, and 1998); Atje and Jovanovic (1993), and Demirguc-Kunt
(1994). Filer, et al (1999) find that an active equity market is an important
engine of economic growth in developing countries. Rousseau and Wachtel (2002)
and Beck and Levine (2002), show that stock market development is strongly
correlated with growth rates of real GDP per capita, and that stock market
liquidity and banking development both predict the future growth rate of the
economy when they both enter the growth regression.
Stock exchanges exist for the purpose of trading ownership rights
in firms, and are expected to accelerate economic growth by increasing
liquidity of financial assets, making global risk-diversification easier for
investors, promoting wiser investment decisions by savings-surplus units based
on available information, compelling corporate managers to work harder in
shareholders’ interests, and channeling more savings to corporations (Greenwood
and Jovanovic, 1990 and King and Levine, 1993). In accord with Levine (1991),
Bencivenga, et al (1996) emphasise the positive role of liquidity provided by
stock exchanges on the size of new real asset investments through common stock
financing. Investors are more easily persuaded to invest in common stocks when
there is little or no doubt on their marketability in stock exchanges. This, in
turn, motivates corporations to go public when they need more finance to invest
in capital goods.
Stock prices determined in exchanges, and other publicly available
information, help investors make better investment decisions. Better investment
decisions by investors mean better allocation of funds among corporations and,
as a result, a higher rate of economic growth. In efficient capital markets,
prices already reflect all available information, and this reduces the need for
expensive and painstaking efforts to obtain additional information (see, Stiglitz,
1994).
On a
broader scope on the debate on whether financial development engenders economic
growth or whether financial development is consequential upon increased
economic activity, Schumpeter (1912) opined that technological innovation is
the force underlying long-run economic growth, and that the cause of innovation
is the financial sector’s ability to extend credit to the “entrepreneur”
(Filer, et al, 1999) while Robinson (1952) claims that it is the growth of the
economy that causes increased demand for financial services which, in turn,
leads to the development of financial markets.
According
to Rosseau and Wachtel (2002), mature financial systems can cause high and
sustained rates of economic growth, provided there are no real impediments to
growth. Carlin and Mayer (2003) also find a positive link between financial
system development and economic growth in developed countries. Greenwood and
Smith (1996) show that stock markets lower the cost of mobilizing savings,
thereby facilitating investments in the most productive technologies. Levine
and Zervos (1998) find a positive and significant correlation between stock
market development and long-run growth. Bencivenga, et al (1996) and Levine (1991) argue that stock market liquidity
plays a key role in economic growth, stressing that profitable investments
require long-run commitment of capital but savers prefer not to relinquish
control of their savings for long periods, and liquid equity markets ease this
tension by providing assets to savers that are easily liquidated at any time.
Kyle (1984)
argues that an investor can profit by researching a firm and obtain vital
information before it becomes widely available and prices change. Thus,
investors will be more likely to research and monitor firms. To the extent that
larger, more liquid stock markets increase incentives to research firms, the
improved information will improve resource allocation and accelerate economic
growth. The role of stock markets in improving informational asymmetries has
been questioned by Stiglitz (1985), who argues that stock markets reveal
information through price changes rapidly, creating a free-rider problem that
reduces investors’ incentives to conduct costly search.
Levine and Zervos (1998) examine, empirically, the issue of whether
stock markets are merely burgeoning casinos, as asserted by Keynes (1936), or a
key to economic growth, and find a positive and significant correlation between
stock market development and long-run growth. Sarkar (2007), however,
criticised their use of cross-sectional approach because it limits the
potential robustness of their findings with respect to country-specific effects
and time-related effects. Akinlo (2008) adds that they did not address the
issue of causality, etc.
Akinlo (2008)
investigates the causal relationship between stock market development and
economic growth in Nigeria during the period, 1980-2006. The study shows that
gross domestic product (GDP) and stock market development are co-integrated,
and that there is only one uni-directional Granger causality running from GDP
to market capitalization. Nwaogwugwu (2008), however, reveals a strong
bi-directional causation between economic growth and stock market development,
defined in terms of market capitalization and volume of transactions, in
Nigeria from 1989-2007. Ujunwa and
Salami (2010) find that stock market size and turnover ratios are
positive in explaining economic growth while stock market liquidity coefficient
was negative in explaining long-run growth in Nigeria between 1986 and 2006.
Most of the research works on capital market development and
economic growth have been based on the ‘supply-leading’ hypothesis and few on
the ‘demand-following’ hypothesis, as postulated by Patrick (1966). The supply-leading
hypothesis claims a causal relationship from financial development to economic
growth such that the intentional creation and development of financial
institutions and markets would increase the supply of financial services, which
would lead to economic growth (King and Levine, 1993a, b; Levine and Zervos,
1998; and Demirguc-Kunt and Maksimovic, 1996).
Little
literature are available on the demand-following hypothesis which claims that
it is the growth of the economy that causes increased demand for financial
services which, in turn, leads to the development of financial markets (see, Robinson,
1952 and Lucas, 1988).
This study seeks to fill this knowledge gap, that is, to explore the impact of capital market development on Nigeria’s economic growth from the demand-following argument that it is the growth of the Nigerian economy that has promoted the development of the capital market, hence a test of reverse causation.
A TEST OF REVERSE CAUSATION IN CAPITAL MARKET DEVELOPMENT AND ECONOMIC GROWTH IN NIGERIA
