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Academic Research Materials
A CRITICALLY STUDY OF THE RELATIONSHIP BETWEEN
CAPITAL MARKET DEVELOPMENT AND
ECONOMIC GROWTH IN NIGERIA
A THESIS FORMAT
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CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
No business can exist and grow without capital (money), which can be
much likened to a lubricant or fuel without which a mechanical
object such as a motor vehicle cannot function. At every stage and
development of a business enterprise, capital is needed, be it to
startup, for expansion or for its daily operations. In order to
capture the essence of capital formation, one must first understand
the various forms of capital. In broad terms, capital refers to any
form of wealth or resources useful in the creation of more wealth or
resources. However, capital can be defined in terms of its natural
characteristics such that it is possible to distinguish human capital
from physical capital or capital stock.
Thus, capital formation embodies a broad and holistic mechanism
through which investible funds and other tangible and intangible
resources are mobilized from surplus sector within the economy for the
creation of financial assets such as loans, leases, etc to be subsequently
utilized for productive investment by deficit economic units. In any
economy, the issue of savings, investment and capital formation is
critical. Capital formation involves the production and setting aside of
real capital goods for use in subsequent production. It involves making
some sacrifices in consumption now with the aim of increasing our
production base.
The subject of financing economic growth and development relates
to the provision of real resources to raise the level of real output
(national income) and living standards (income per head) in developing
countries like ours. The growth of output is not, of course, the only goal
of economic policy in developing countries, but policies to raise the rate
of output growth and this forms the major part of most countries’
development plans, because: (i) growth is seen as a necessary condition
for an improvement in the general welfare and because (ii) growth is
seen as the precondition for the achievement of other development
objectives such as the provision of greater employment opportunity, the
redistribution of income and wealth, and the provision of social capital
in the form of housing, communication and facilities for the
development of human resources. Although it has become fashionable
for the international middle class to renounce growth, it remains, in the
absence of a massive redistribution of world income, the only means of
eradicating primary poverty, which still afflicts at least twothirds of
humanity.
Economic growth requires real resources devoted to the production
of capital goods, where capital goods are defined broadly to include
industrial plant, machinery, social overhead capital, and educational
facilities indeed the production of anything, which is not immediately
consumable but yields a flow of income in the future. The economic
growth of a nation and the ability to gain the most from its accumulated
resources, (men, materials, money and machines) of necessity requires a
well developed capital market(s) that continuously oil them. The demand
for funds – economic capital comes mainly from three sources namely:
business, government and individuals and exist because their income
does not equal their need for current expenses plus expenditure for fixed
assets. Funds raised through debt and equity instruments by business;
government and individuals are normally invested in fixed assets and
inventories, public facilities and housing respectively.
Modern economies rely to a very large extent on the existence of
efficient and reliable credit system for their growth and development. As
financial intermediaries, financial institutions facilitate the operation of
the requisite credit system by mobilizing funds for on lending to
companies and governments. This allocating function is crucial in
determining the overall growth of an economy for if capital resources are
not provided to those economic areas where demand is growing and
which are capable of increasing productivity and production, and then
the rate of expansion of the economy will be constrained.
History of direct government involvement in economic management
is both long and substantial. Government therefore designs activities to
stimulate and assist private enterprises, regulate and control business
practices so that operations within the private sector are consistent with
the public interest. Government and companies mobilize funds for
economic activity designed to increase, improve and/or maintain the
productive quality of the existing stock of capital. The Nigerian capital
market enables government and companies to mobilize and allocate
funds for new project development, expansion, modernization and
refurbishment of plants for both government and industrial/commercial
projects. Since the introduction of Structural Adjustment Programmes
(SAP) in 1986, privatization/commercialization and debt conversation
programmes emphasis has shifted from reliance on external funding to
using domestic resources in order to accelerate economic growth. For
sustainable growth and development, funds must be effectively
mobilized and allocated to enable the economy and business harness
their human, material and management resources for optional output.
The centrality of savings and investment to economic growth has been
given considerable attention in the literature (Soyode, 1990, Aigbokan,
1995, Samuel, 1996, DemirgueKunt and Levine, 1996., Onyuike, 2000).
According to Ahmad (1986) and Oronsaye (2003), the capital
market and its institutions are so much talked about and yet least
understood by the general public. So much is said and written about the
capital market yet, so few people understood and still fewer people utilize
the services of the capital market. Even amongst the educated class; the
capital market is often regarded as an elitist affair and the exclusive
preserve of the top – echelons of the capitalist enterprise system. It is
even regarded by some as another neocolonialist ploy to perpetuate the
interest of the upper and middle classes in the ownership and control of
the enterprise system. As posited by Oronsaye (2003), the Nigerian
capital market is still underdeveloped when compared when with other
countries of the world. Studies show that less than 3 percent of
120million Nigerians invest in the capital market unlike 77percent in the
United States, 63 percent in the European Union, and more than 26
percent in South Africa. This ignorance was further supported by the
various road shows organized by the Nigerian Stock Exchange to boost
the needed awareness of the importance of the capital market in order to
promote investment culture among Nigerians at home and in diaspora.
Understanding the role of capital market by the generality of Nigerians
will facilitate the ultimate goal of restructuring the Nigerian economy.
The misconception is compounded by the fact that the capital market
per se, and its actors and wares are not people and goods as commonly
seen in everyday market place. In the capital market, the actors are
corporate institutions comprising the apex regulatory bodies (including
the Nigerian Stock Exchange, the Securities and Exchange Commission,
etc) and a host of intermediation agents called operators, while the
goods traded are actually bonds, stocks and shares. By their special role
in creating money and liquidity, capital market institutions are
indispensable to the nation’s economic system and have a catalytic
impact on the growth of the market oriented economy.
1.2 STATEMENT OF THE PROBLEM
The Nigerian economy has been bugged by a lot of socioeconomic
and political malaise, antithetical to economic growth and development.
Capital markets the world over; serve as veritable channels to mobilize
both domestic and foreign savings for developmental purposes. But
despite the feat achieved by the Nigerian capital market in the area of
capital formation over the years, individuals, corporate bodies and
governments were yet to take full advantage of the opportunities
available in the market. The capital market remains underdeveloped
when compared to other countries of the world such as Hong Kong,
Australia, Switzerland, USA, UK, South Africa, Egypt, and Malaysia in
relation to market capitalization, number of listed companies, trading
activities in both volume and value of securities etc. This study has also
tried to identify the factors inhibiting the development of capital market
to include: low level of financial intermediation, dismal domestic savings
mobilization, investor apathy, lack of market depth, infrastructural
inadequacies, low public awareness, insufficient knowledge and
information about the capital market and transactions being conducted
on archaic trading platform, buyandhold attitude of shares certificates
by investors which suppressed liquidity and stunting overall market
activity, lack of trust, transparency and poor corporate governance, few
financial instruments, institutions and markets, inadequate legal and
regulatory frameworks, low liquidity, infrequent trading and fewer
listing of 276 in 2004 than those of Sri Lanka established in 1984 with
1778, South Africa – 1000 while India can boast of 6500 quoted
companies. The limited listing of private companies in Nigeria limits the
attractiveness of the capital market for domestic and foreign investors.
The lack of absorption capacity and low demand for equity securities
and the absence of government securities for the past 17years have
worsened the attraction of new companies and investors to the market.
Since inception in 1961, the Nigerian capital market has had a
mixed history of growth. It has gone from an inactive market to one of
the potentially buoyant centerpieces of a new emerging market. It is
considered the fourth largest market in the continent and one of the
best performing world wide, according to recent survey published by
United Nations Development Program (UNDP). Market capitalization has
growth from N40.7million in 1970 to N2.112 trillion in 2004 just as the
number of listed companies has dramatically increase from 19 in 1961
to 276 in 2004. Critics argued that given its long history of existence the
Nigerian Capital market should have done better. One line of research
argues that capital market development is not important to economic
growth. Another line stresses the importance of capital market in
mobilizing savings, allocating capital, exerting corporate control, and
easing risk management. Moreover, some theories provide a conceptual
basis for the belief that larger, more efficient capital market boost
economic growth.
In assessing these allegations levied against and for capital market
development, it might be expedient to address some questions such as:
1. Why has it become so important to develop capital market?
2. Do capital market affect overall economic growth and if so, how?
3. What is the relationship between capital markets in fostering
economic growth? And how can Nigeria benefit from capital
market development?
4. What are the problems of the capital market in Nigeria?
It is on the basis of the foregoing that this research work draws
interest by attempting to empirically analyse the relationship between
capital market development and longrun economic growth in Nigeria.
1.3 SIGNIFICANCE OF THE STUDY
The Nigerian capital market as a network of facilities for mobilising
and dealing in longterm funds has grown substantially from 19
securities listed on the Nigerian Stock Exchange in 1961 to 276 in 2004
which is made up of 69 federal government development stock and
industrial loans/bonds/preference stocks and 207 equities. The market
capitalization of securities has also grown appreciatively from
N4.5billion in 1980 to N2.112 trillion in 2004. Transaction value was
N1.49million in 1961, and in 2004 it has grown to N225.82billion. All
Share Indexes increases from 513.8 in 1990 to 23844.45 in 2004.
It is expected that the result obtained from this study will be of
immense benefits to researchers, business organisations, government,
investors as well as people in general. The study of the capital market is
of paramount importance to the longrun growth and prosperity of
business and government organisations since they provide the funds
needed to acquire fixed assets and implement programmes aimed at
ensuring the continued existence of organisations. The attainment of
efficiency in the utilisation of financial resources towards sustainable
economic growth and development remains a cardinal challenge for any
wellmeaning nation. Furthermore, the significance of this research lies
in the fact that the financial system is important in bridging the
savings/investment gap. Kolb (1983) noted the importance of financial
markets when he said, “these markets provide fluidity of capital by
making possible the transfer or allocation of savings in the economy to
the demanders. Without the financial markets, the ability of each
economic unit to acquire real assets would be limited to the savings of
that unit. Economic growth and development by the society would be
stifled, resulting in much lower productivity and wealth accumulation”.
The unique benefit of the stock market to corporate bodies
and government is the provision of longterm, nondebt financial capital.
Through the issuance of equity securities, companies acquire perpetual
capital for development and this also invariably enables companies to
avoid overreliance on debt financing, thus improving corporate debtto
equity ratio. The study on capital market development and economic
growth will help the government to restructure the Nigerian economy
through improved financial intermediation, which leads to higher
savings, and capital accumulation, which are channeled to high
productive projects. Thus, in these period of serious economic
difficulties when most economies are inward looking for effective
mobilisation and efficient allocation of scare financial resources, this
study will provide needed awareness among Nigerians for greater
patronage of the Nigerian capital market. Finally, like many other
studies before it, this study will stimulate further research into capital
market development and its relationship with capital formation and
sustainable economic growth.
1.4 THE RESEARCH OBJECTIVES
The main objective of this study is to critically examine the
relationship between capital market development and economic growth
in Nigeria (1961 – 2004). To achieve this main objective, the following
specific objectives are pursued:
i) To describe the nature and patterns of the capital market in
Nigeria.,
ii) To discuss the important role played by the capital market in the
economic health of Nigeria.
iii) To ascertain the reasons why and how government intervenes in
capital market in Nigeria.
iv) To examine the various constraints that impede the development
of efficient capital markets and how these constraints can be
removed.
v) To make recommendations as to how the optimum linkages
between capital development and economic growth can be
realised in Nigeria.
1.5 SCOPE OF THE STUDY
Essentially this research focuses on an examination of the
relationship between capital market development and economic growth
in Nigeria (19712005). This period covers the major historical
developments in the economic history of Nigeria and this is a period
considered long enough for any meaningful study. The research also
concerned itself with the description of four categories of capital market
players, which includes:
1. Provider of funds: Individuals, unit trust, development Banks.
2. User of fund: Companies, Governments.
3. Intermediaries: Stockbroking firms, issuing houses, registrars,
auditing firms.
4. Regulators: Securities and Exchange Commission (SEC), (Apex
regulatory body), The Nigerian Stock Exchange (NSE), (a Self
Regulatory Organisation (SRO)).
Financial instruments (equity, preference shares, debt instrument,
government bonds (Federal, State and Local Governments), industrial
loans/debenture stock and bonds and derivatives (options, futures,
rights etc) used in the capital market was also discussed.
1.6 ORGANISATION OF THE STUDY
This project is structured into five chapters. Chapter one is the
introduction, which consists of the background, research problems,
significance, research objectives, scope and organisation of the study.
Chapter two focuses on the review of related literature concerning
capital market development and economic growth, economic growth
theories, and efficiency in capital market. Chapter three examines the
historical profile of the Nigerian capital market, research hypotheses,
data specification, method of data collection and method of data
analysis. Chapter four is the data presentation and analysis, which
examined the relationship between capital market development and
CHAPTER TWO
LITERATURE REVIEW AND THEORETICAL FRAMEWORK
2.1 CAPITAL MARKET AND ECONOMIC GROWTH DEFINED
A capital market is the complex of institutions (regulators,
facilitators, issuers and investors) and mechanisms through which
intermediate and longterm funds of households, firms and government
are pooled and made available to various sectors of the economy for
development purposes (Dougall and Gaumitz, 1975). Alile (1986) defines
the capital market as a network of specialised financial institutions that
in various ways bring together suppliers and users of capital. By their
special role in creating money and liquidity, capital market institutions
are indispensable to the nation’s economic system and have a catalytic
impact on the growth of the market oriented economy. The importance
of the capital market stems from the fact that it enables institutions in
the economy that are in need of medium to longterm funds for the
acquisition of fixed assets and other longterm projects to obtain such
funds. In addition, the capital market provides a mechanism through
which longterm loans and investments can be liquidated. Ahmed
(1993) posited that effective capital markets are crucial for the efficiency
and solvency of the financial system. These markets enhance
competition, reduce intermediation costs and provide borrowers and
lenders with alternative sources of fund or investment outlets (equity
and/or debt) for the period most convenient for them. The level of
development of capital markets also determines the flexibility and pace
with which the financial system can adjust to internal changes and
absorb external shocks. The effectiveness of financial market is
enhanced by sound fiscal and monetary policies, appropriate legal and
regulatory framework and by professionalism on the part of market
operators. Although Nigeria’s capital market have expanded over the
years; the pace of growth of the Nigerian capital market has been a
checkered one because until recently market operators, institutions and
investors have tended to deal at the short end of the market in order to
hedge against inflation and other structural distortions in the system.
With the introduction of the Structural Adjustment Programme (SAP)
and with the emphasis on deregulation of the market, there are
indications that there would be greater efficiency in the market with a
spontaneous lengthening in the maturity of assets demanded by the
public, and expansion in related trading and a wide range of financial
instruments.
In the light of this, an efficient capital market, comprising of the
primary (i.e. new issues of securities) and secondary (trading in old
issues of stock) markets has a catalytic impact on growth in the market
oriented economy. According to Obadan (1998), the Nigerian capital
market, at inception, was intended to accomplish a number of
objectives, which include:
Provision of local opportunities for borrowing and lending for long
term purposes;
To enable governments mobilise longterm capital for the development
of the country;
To provide foreign businesses with the facility to offer their shares and
the Nigerian public an opportunity to invest and participate in the
share ownership of foreign businesses;
To provide facilities for quotation of and ready marketability of shares
and stock and opportunities and facilities to raise fresh capital in the
market;
To provide a healthy and mutually acceptable environment for
participation and cooperation of indigenous and expatriate capital in
the joint effort to develop the Nigerian economy, to the mutual benefit
of both parties; and.
To introduce a code of conduct, check abuses and regulate the
activities of the operators of the market.
The rapid development of capital markets has attracted the
attention of development economists, policy makers, practitioners and
planners. Recent government interests in promoting investments and
attracting foreign capital inflows in developing countries have focused on
creating an enabling environment for the emergence of a virile, active
and dynamic capital market. Not surprisingly many countries in Africa
such as South Africa, Botswana, Cote d’lvoire, Egypt, Ghana, Kenya,
Mauritius, Morocco, Tunisia, Uganda and Nigeria have reformed their
laws and regulations to removed barriers that impede capital market
development with a view to attract foreign portfolio flows (Nyong, 1997).
Brewis (1990) said that the Nigerian capital market exists to
provide risk capital for Nigerian commerce and industry and to provide
investors with a market in which to dispose of their investments when
they wish. Capital markets are of key importance to the long run
growth and prosperity of business, and government organisations since
they provide the funds needed to acquire fixed assets and implement
programmes aimed at ensuring organisations continued existence. The
capital market facilitates the transfer of new savings to new investments
and the exchange of old securities. The backbone of the capital market
is the various Security Exchanges, which provide a market place for debt
and equity transactions. Capital markets the world over serve as
veritable channels to mobilize both domestic and foreign savings for
developmental purposes. The financial sector of any nation is usually
regarded as its ‘lifeline’, mobilizing capital resources and facilitating
their flow into productive activities. The ability to efficiently mobilize
and allocate resources among competing needs in the society is a major
indicator of the level of development of the financial sector. A weak and
inefficient financial system would therefore give rise to low financial
intermediation, which invariably will fail to adequately support the
development process. Thus, efficient money and capital markets are
crucial for the efficiency and solvency of the financial system.
Economic growth means a sustained increase in total national
income. It is an economic condition, which is present when a country’s
capacity to produce goods and services grow from year to year over a
long period of time. Economic growth is the steady process by which
productive capacity of the economy is increased over time to bring about
rising level of national income. Economic growth means more output,
which implies more input and more efficiency – that is, an increase in
output per unit of input (Udu and Agu 1989). Economic growth is the
rate of expansion of the national income or total volume of production of
goods and services of a country. According to Parkin (1990), economic
growth is the persistent expansion of our production possibilities. Two
key activities generate economic growth: capital accumulation and
technological progress. Capital accumulation is the growth of capital
resources. Technological progress is the development of new and better
ways of producing goods and services. Economic growth is either growth
in national output, as measured by Gross National Product (GNP) or
Gross Domestic Product (GDP). The first measures economic power, the
second measures the well being of citizens. In the most fundamental
sense, economic growth is concerned with policy measures aimed at
expanding a nation’s capacity to produce. In general, economic growth
can be seen as an outward shift of an economy’s production possibilities
frontier. That is, economic growth means increase productive capability.
It is a function of labour and capital. This does not happen without
resources being made available for production purposes. On the other
hand, no amount of resources utilised will result in reasonable growth if
they are not used productively. The growth impact of given resources
(savings) will reflect the efficiency with which they are utilised. The
measurement for the rate of growth is the national income. Economic
growth generally refers to an increase in a country’s output measured by
the Gross Domestic Product (GDP) or National income in real terms
between two periods. The physical ability of an economy to produce
more goods and services is dependent on a number of factors amongst
which are capital accumulation, labour force, natural resources,
productivity, technological progress, as well as a favourable socio
political environment, (Ojo, Oladunni, Bamidele 1997).
Demson and Kendrick (1985) said that there are two types of
growth namely extensive growth and intensive growth. Extensive growth
is growth in output resulting from increases in inputs (capital and
labour). If labour grows by X percent the percentage of growth in
national output is roughly calculated by this X percent weighted by
(multiplied by) labour’s relative contribution to production. Extensive
growth contribution might be measured by the share of wage payments
in the value of output. Intensive growth is growth that results from
improvements in factors quality, technology, and efficiency of markets
and institutions. Intensive growth results from the four listed factors:
advances in knowledge (technological break through), a better –
educated labour force, improved resource allocation, and scale
economies. Growth that occurs through technological change and
capital deepening brings social transformation. Economic growth could
be define either as increasing real national output (income) or increasing
per capital real output. The process of economic growth necessarily
involves the structural transformation of the society, along with
concomitant changes in institutions, interrelationships and value.
What policies are available to promote economic growth? According
to basic macroeconomic model, a policy mix that includes a structurally
balanced budget and a monetary policy leading to relatively low interest
rates will promote growth. Economic growth can be promoted by other
policies encouraging saving and investment as well. In addition growth
could be potentially stimulated by tax policies designed to encourage
savings and investment.
According to Udu and Agu (1989) the following are the factors
affecting economic growth: the quality and quantity of capital available;
the skills and efforts of the working population; organisational factors,
such as specialisation, and technological improvements (discovery of
fertilizers); the general economic climate involving trade relationships
with other communities, the extent of monopoly and the impact of
government policy.
2.2 CAPITAL MARKET DEVELOPMENT
What is the conceptual definition of capital market development?
How can capital market be empirically measured? Theory does not
provide a unique concept of capital market development to guide
empirical research. Existing models suggest that capital market
development is a multifaceted concept, involving issues of market size,
market liquidity, and integration with world capital markets. While
capital market development naturally implies greater use of equity and
longterm debt instruments in raising capital. Capital market
development has involved research activities aimed at improving market
efficiency, and competitiveness as well as introducing new instruments
and initiating policies with positive implications for the capital market.
The Securities and Exchange Commission thus in carrying out its
duties ensures that it balances regulation with development. In other
words, the market must not be over regulated as to hinder its
development while regulatory issues are not neglected in pursuit of its
development objectives. According to Oladejo (1996) the incentives to
capital market development in Nigeria are as follows: computerization
and link up with internet; reduction of withholding tax; reduction of
period for raising funds; reduction in settlement date;
internationalization of the market; privatisation of government
parastatals; political stability; and realistic exchange, interest and
inflation rates.
2.3 MEASURES OF CAPITAL MARKET DEVELOPMENT
While the development of any nation is measured by criteria such
as its Gross National Income per capital, etc capital market development
however according to Akingbohungbe (195) is assessed by such criteria
as liquidity, choice, efficiency and regulation. The presumption is that
institutional and other infrastructural facilities are in place. All these
criteria and their interplay bear influence on the successful marketing
of new issues. Business opportunities, the size of income, as well as the
growth of household and institutional savings inter alia are factors that
control demand for and supply of new issues regulation of capital
market is essential to orderly conduct of affairs amongst the parties to
capital market transactions, the efficiency of the market by way of
information dissemination aid investor perception. In terms of choice,
the investing public in Nigeria has all along been restricted by the rather
than nature of the Nigeria capital market since inception. This has
tended to encourage buy and hold attitude of Nigeria market. The
indicators of capital market development are market capitalization, new
issues, liquidity (trading value, trading volume, turnover ratio, and total
value traded ratio), number of listed companies, and market index,
1. MARKET CAPITALIZATION
Market capitalization is the market value of a company’s issued
share capital. It is the product of current quoted price of shares and the
number of shares outstanding. The term is also used as performance
indicator of the capital market when all listed companies are considered.
Market capitalization is a common index often used as a measure of the
size of the capital market. Market capitalization equals the total value of
all listed shares. It is a function of the prevailing market price of listed
equities and the size of the issued and paidup capital of the affected
companies and is derived for each quoted company by multiplying the
market price of equity by the outstanding share of the company. The
market capitalization for the entire equity market is thus obtained by
summing up the market capitalization of all quoted companies.
For individual quoted companies, the size of its market
capitalization is an indicator of the market value (i.e. investor’s
assessment) of the company. Thus, market capitalization does fluctuate
with movements in the market price of company’s equity. Similarly, an
increase in the outstanding shares of a company with the market price
either held constant or increased would enhance the market
capitalization of the company. However, an improvement may not
necessarily be witnessed in market capitalization of outstanding share
increase but the market price drops significantly.
Generally, the aggregate market capitalization of a capital market
would witness increasing trend in bullish market while the converse
would happen in a bearish market situation. To notable global investors,
the size of market capitalization is an important motivating factor for
investment presence in a given company or market.
To assess how big a stock market is within the national economy,
the market capitalization is usually compared with the Gross Domestic
Product (GDP).
2. PRIMARY SECURITIES OR (NEW ISSUES)
Primary Securities or new issues are funds generated through the
sales of long term securities in form of stocks and bonds for the first
time after subscription by the general public, or only by existing
shareholders of a company or if placed privately (directly) with
previously identified investors.
The total amount of new issues raised in the capital market could
be indicative of the popularity of the capital market as a source of funds,
which in turn is largely dependent on investors’ confidence, and the
comparative cost of raising capital from the competing sectors’ of the
financial market. Certain government policies could also influence the
level of primary market activities. For instance, where interest rates are
deliberately kept low, the tendency would be for corporate bodies to
source all or a good proportion of their longterm funds through the
money market, as it becomes a cheaper financing source. Tax policies,
which favour money market instruments, could also shift funds away
from the capital market and consequently impact adversely on the
subscription level of new issues and indeed could dampen the desire by
corporate bodies to source funds through the market.
The health of the national economy is another vital factor, which
usually impacts on the level of new issues. In fact, a strong correlation
does exist between the level of new issues and the economic health of a
country. When economic activities are declining therefore, the level of
new issues usually drops while the converse happens in times of
economic expansion.
In most economies where public companies meet their additional
fund requirements through the floatation of subsequent issues, the
frequency of new issues would to some extent be dependent on the
number of public companies operating within each of such economies.
The contributions of the new issues market to the national
economy may be assessed through a comparison of new issues with
some economic indicators such as the Gross Fixed Capital Formation
during a given period. Capital Formation is defined as investment in
fixed assets, which in part are financed with monies raised through the
capital market. Thus, new issues contribute to the stock of capital in an
economy and invariably to economies growth and development. In some
economies; the size of the new issues market is a major source of funds
for the acquisition of fixed assets in the economy.
3. LIQUIDITY
Liquidity is used to refer to the ability of investors to buy and sell
securities. It is an important indicator of capital market development
because it signifies how the market helped in improving the allocation of
capital and thus enhancing the prospects of longterm economic growth.
This is possible through the ability of the investors to quickly and
cheaply alter their portfolio thereby reducing the risk of their investment
and facilitating investment in projects that are profitable though with a
long gestation period. Two main indices are often used in the
performance and rating of the stock market: Trading Value and Trading
Volume.
Trading Value: Trading Value is the amount of all deals transacted on a
Stock Exchange during a given period. The trading value, on each
trading day is calculated by multiplying the number of shares,
bond/stock that changed hands among share/stockholders by the
prevailing market prices of such securities. A rapid increase in the
trading volume of security in the exchange is indicative of interest in the
security or the market. Persistence rise in volume and prices can
sometimes lead to overheating of the market and a consequent crash.
Trading Volume: The trading volume (i.e. the number of shares/stock
traded) and value are also important indicators of the level of liquidity,
the efficiency of the infrastructural facilities (such as the Clearing and
Settlement System) of a capital market and the investment culture of the
populace.
Turnover Ratio: The turnover ratio (i.e. trading value as a percentage of
market capitalization) is another method of assessing how active a
capital market is. Turnover ratio is usually higher in active markets than
markets, which are relatively inactive. Turnover ratio is used as an index
of comparison for market liquidity rating and the level of transaction
costs. The ratio equals the total value of shares traded on the stock
market divided market capitalization. It is also a measure of the value of
securities transactions relative to the size of the securities market. Total
value traded ratio measures the organized trading of equities as a share
of the national output.
4. NUMBER OF LISTED COMPANIES
Number of listed Companies: The total number of quoted companies
on an exchange is another criterion to assess the popularity and size of
a capital market. In countries with high aversion to companies going
public, the number of listings is usually small while in countries where
public quotation is seen as a prestige and its benefits well realized, the
number of equity listing is relatively high. One factor which might also
impact on the number of public quotations is the stringency or
otherwise of the listing requirements. Some countries, in order to
encourage wellrun markets introduce markets with less listing
requirements e.g. the USM in Britain, the Second Marche in France and
the SecondTier Securities Market (SSM) in Nigeria. In markets with
strong aversion to quotation, it has been discovered that government
policies and supplyside incentives are necessary catalysts in
stimulating listings.
5. MARKET AVERAGES AND INDICES
Stock market indices are vital as investment benchmarks. Market
Averages and Indices: A market average or index is an important
yardstick for evaluating the performance of a stock market as a whole or
a given sector of it. It is considered an important analytical tool intended
to depict the behaviour of a stock market and indeed the direction of the
economy among other things.
Aggregating the prices of all equities derives stock averages and
dividing the total sum by the number of constituent securities derives
stock averages. In the alternative a select group of comparable securities
could be chosen, their prices weighted, adjusted, summedup and
divided by the number.
In essence, an average is merely an arithmetic mean of the prices
of the group of selected securities; the Dow Jones Industrial Average in
USA is perhaps the most popular stock average. An index on the other
hand is a weighted average in relation to the base period. The market
values of the various securities are in order words related to a given
base period. Rising averages and indices are evidences of firm prices
while falling indices indicate general drop in prices. The index movement
is very important to analysts and investors.
According to Marsh (2002) indices have many purposes. First, they
are used to monitor and measure market movements, whether in real
time, daily, or over decades. A good index will tell us how much richer or
poorer investors have become. Second, equity and bond indices are
economic barometers, while equity indices are leading indicators.
Monitoring markets and comparing movements with data such as
wages, profits and inflation helps us to understand economic conditions
and prospects. Third, indices provide essential benchmarks in fund
management. A managed fund can communicate its objectives and
target universe by stating which index or indices serve as the standard
against which its performance should be judged.
Forth, indices underpin products such as index funds, exchange
tradedfunds, and options and futures on indices. These indexrelated
products form a several trillionnaira business and are used widely in
investment, hedging and risk management.
Finally, indices support research (for example, as benchmarks for
evaluating trading rules, technical analysis systems and analysts’
forecast); risk measurement and management; and asset allocation and
international diversification decisions.
Indices are all – pervasive, with more than 4000 in operation.
Equity market indices; such as the Dow, Nikkei, Dax FTSE100 and all
share indexes tend to be the best known. But indices are also important
for other assets such as government and corporate bonds. Commodities
currency baskets and retail prices. As well as market indices, there are
numerous sub indices. For equities, these cover sectors, size bands,
investment styles, and even ethical and religious dimensions; for bond
indices they span maturities and credit risk categories. There are
international indices that aggregate country indices into regions (such
as Asia), currency zones (such as the euro), market types (such as
emerging markets) and worldwide indices.
6. PRICE – EARNINGS RATIO
Price – Earnings Ratio: The Price – earnings ratio is a figure
depicting how covered by earnings is an equity investment in any
company. It may be based on actual earnings of a company, or on a
projected figure in which case it is referred to as “projected price –
earnings ratio”. It gives an idea of the period it takes an investor to
recoup his/her investment going by present earnings trends of a
company. It is derived by dividing the prevailing market price of an
equity by the earnings per share derives it. The perceived investment
risk of an equity is usually focused though its priceearning ratio. Thus,
a seasoned company with good and stable financial and dividend
payment track record could have a high priceearnings ratio while a
poorly performing company would likely record a low priceearnings
ratio. The priceearnings ratio is the inverse of the earnings yield or the
returns on equity investment of a company.
7. CONCENTRATION
The factor measures the level of domination of the market by a few
enterprises. The significance of concentration as a measure of
performance of capital market is because of the adverse effect it may
have on the liquidity of the market. The share of market capitalization
accounted for by the 10 largest stocks often measures the degree of
market capitalization of the top ten equities listed on the Nigerian Stock
Exchange.
8. VOLATILITY
Volatility is a twelvemonth rolling standard deviation estimate
based on market returns. Greater volatility is not necessarily a sign of
more or less capital market development. Indeed high volatility could be
an indicator of development, so far as revelation of information implies
volatility in an efficient market (Bekaert and Harvey 1995)
9. ASSET PRICING
It 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 information 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 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).
2.4 THEORETICAL SIGNIFICANCE OF CAPITAL MARKET
Theoretically, there is a closeif imperfectrelationship between the
effectiveness of an economy’s capital market and its level of real
development (McKinnon 1993 and Shaw 1973). Financial market
provides liquidity (Bencivenga and Smith 1991, Levine 1991), promote
the acquisition and dissemination of information (Diamond 1981, Boyd
and Prescott 1986, Williamson 1986, Greenwood and Jovanovic 1990),
and permit agents to increase specialization (Cooley and Smith 1992).
Companies require finance according to their different
circumstances and needs. An analysis of corporate capital raisings by
the nature of the financial need identifies three broad categories of
capital requirements:
i) Capital required to startup new business – “Start up Capital,”
ii) Capital required to develop/expand or preserve existing
business – “Development Capital”, and
iii) Capital for new technology and high – risk ventures “Ventures
Capital”
The paramount role of the state in providing effective regulations of
its capital market is also underscored by the accelerator effect of the
capital market on principal objectives of governance – revenue
generation, inflation control and strong balance of payments position.
The capital market business in recent times has become so globalised
that regulation of each national market has begun to focus attention
towards standards that are generally acceptable and considered to be
necessary for safe cross border investments. The level and intensity of
productive activities as measured by such vital economic indicators as
the gross domestic product, per capita income, foreign exchange rate,
balance of payments, inflation and interest rate are vivid reflections of
economic performance of any nation. The financing and expansion of
crucial productive activities therefore, have direct relevance to economic
growth and development and political stability.
The nature and economic significance of the relationship between
capital market development and economic growth vary according a
country’s level of economicdevelopment with a larger impact in less
developed economies (Filler, Hamousek and Campes 1990). The
proponents of positive relationships between capital market development
and economic growth hinged their argument on the fact that the capital
market aids economic growth and development through the mobilization
and allocation of savings, risk diversification, liquidity creating ability
and corporate governance improvement among others.
Edo (1995) asserts that securities investment is a veritable medium
of transforming savings into economic growth and development and that
a notable feature of economic development in Nigeria since
independence is the expansion of the stock market thereby facilitating
the trading in stock and shares. In 1990, Soyode posited that a self
sustained growth process requires substantial investible resources,
which are readily available at the capital market. The development of
the capital market, and apparently economic growth, provides
opportunities for greater funds mobilisation, improved efficiency in
resource allocation and provision of relevant information of appraisal
(Inanga and Emenuga 1997).
Capital market contributes to economic growth through the
specific services it performs either directly or indirectly. According to
Okereke Onyiuke (2003), primarily capital markets exist to reconcile the
conflicting needs of savers/investors and publicly traded securities. The
intermediation between the needs of firms and investors represents the
core function of capital markets, which, by extension, enables
functioning capital markets to facilitate:
Risk diversification – provides a means for sharing investment
risk.
Information acquisition about companies – provides
incentives to seek information about companies.
Corporate control – provides the means for improving
corporate governance.
Also, capital markets function to facilitate the dispersion of
business ownership, thus contributing to asset formation at the
household level. Finally, capital markets, where they exist, facilitate the
transmission and implementation of macroeconomic policies, and is why
public authorities responsible for economic policy as well as private
sector agents who are active in the capital markets have a vested interest
in capital markets that are both efficient and stable. By offering
financial intermediation for debt and equity instruments, capital
markets work to ensure greater competition among financing sources
and thereby promote efficiency in the mobilisation and allocation of
financial resources.
2.5 THE CONCEPT OF THE COST OF CAPITAL
Cost of capital is the cost incurred in securing funds, or capital for
productive purposes. The costs include interest, legal, administrative
and information search charges. This means that cost of capital is likely
to be greater or equal to interest rates on loans.
The issue of cost of capital for firms is a most crucial factor in
finance decisionmaking. Every mode or avenues of obtaining capital to
finance the firm’s assets attracts a cost, either in the absolute or
opportunity form. The more marginal an investment decision is, the
more important it is for the firm to have the required prerequisites for
the measurement of the relevant cost of capital, at least in providing the
firm’s management with a meaningful capital cost assessment. The
firm’s cost of capital can be defined as the rate of return that a company
earn on an investment that will be just sufficient to maintain the value
of business.
Indeed an important part of financial management involved raising
capital in the proportion that will minimize overall cost. There are
alternative ways of arriving at weights but in reality the cost of capital is
merely the weighted arithmetic mean of the cost of each component of
firm’s capital. This need not concern us unduly as far as debt is
concerned; it is the calculation of the equity cost that is central to this
argument. For, while the cost of the debt is represented by the actual
outofpocket payments needed for servicing, the cost of equity is purely
conceptual and bears little relation to payments to equity holders.
The firm’s cost of capital can be defined as the rate of return that a
company must earn on an investment that will be just sufficient to
maintain the value of the business. In capital budgeting decisions, the
discount rate was a significant factor in assessing the profitability of
projects. This rate is often referred to as the cost of capital and it
represents a cutoff rate for the allocation of capital to investment
projects. It is the required rate of return needed to justify the use of
capital and this, in theory, should be the rate of return on a project that
will leave unchanged the market price of the shares.
In evaluating capital projects the appropriate discount rate applied
could be viewed as (a) the explicit cost of funds used in financing the
project(s) or (b) the opportunity cost of foregone investment i.e. the yield
on the best alternative to the project in question. Most of our discussion
later will focus on the explicit cost of capital but in discussing cost of
retained earnings and cost of depreciation, regard will be had to the
opportunity cost concept. With regard to the explicit cost concept, the
appropriate discount rate to be used in evaluating a project is the firm’s
overall or composite cost of funds and not the cost of a particular
component fund to be raised in financing the project. Furthermore this
composite or overall cost of funds should be the marginal cost of funds
to be raised in future for financing the projects and should not be the
historical cost of the funds that have been raised in the past as these
have bearing on this decision. For a proper understanding of the
computation of a firm’s composite or overall cost of capital one needs to
discuss the explicit cost of each of the component source of fund. It is
the discount rate (or what was previously referred to in the valuation
models as the capitalization rate) that equates the present value of the
funds received by the firm, net of underwriting and other costs, with
the present value of expected outflow. Depending on whether the source
of fund is a bond, preference share or ordinary share, the outflows could
be interest payment, repayment of principal or dividends. Therefore the
explicit cost of a particular component source of fund can be determined
by solving for k in the equation below:
Po + Q1 + Q2 + Qn(1+k) (1+k)2 (1+k)n
Where Po is the net amount of funds received by the firm at time
O, Q is the outflow in period t, and n is the duration over which the
funds are provided.
COST OF DEBT CAPITAL
A firm’s debt will often comprise of longterm loans, debentures,
and bonds. As a first appropriation, the firm’s cost of debt capital is the
interest charge on the debt, i.e. the rate of return earned by the
investors through that component of capital financing.
The foregoing equation is a general one for all sources of funds. For
debt capital the equation can be expressed as follows:
Po + I 1 + I 2 + I n + M (1+d) (1+d)2 (1+kd)n
Where I is the interest payment and M is maturity value, Po is the
net proceeds of the debt issue and kd, which is the before tax explicit
cost of debt, is discount rate that equates the present value of all
interest payments and maturity value with Po.
Because interest charges are tax deductible (i.e. they are deducted
in arriving at the firm’s profit) then the real explicit cost of debt capital
to firm is the aftertax cost of debt, which is:
Kd ( 1 – t )
Where t, is the marginal rate of tax. The use of kd(1 – t)
presupposes that the firm is profitable, therefore the explicit cost of debt
capital for an unprofitable firm is the beforetax cost kd, because it does
not gain the tax benefit associated with interest payments.
Generally the foregoing i.e. kd(1 – t) is regarded as the explicit cost
of debt capital, but in cases when bonds are issued at a premium or
discount and not at their face values. Usually the premium or discount
is amortized for tax purposes and where the premium or discount is
material, the aftertax cost of the debt capital can be expressed as
follows:
kd (1 t) = (1 t) (1+1/n (M – P))
½ (M + P)Where I is the period interest payment in naira, M is the par to
maturity value of the bond, P is the bond’s issue price (hence M – P is
the premium or discount), and n is the life of the bond.
In cases where the firm may have a policy of maintaining a given
proportion of debt to its capital structure in such a way that debt
retirements are supplanted by new debt issues, then the debt could be
viewed as having been issued in perpetuity and the beforetax cost of
debt is expressed below:
Kd = I/Po
and aftertax cost of debt, kd (1 –t) = I (1 – t) Po
Where I is the fixed interest cost in all periods, and Po is the net
proceeds of the issue.
COST OF PREFERENCE SHARE CAPITAL
Preference Share capital differs from debt capital in some respects
though they are both subject to fixed payments. The fixed payments
made in the case of preference share capital are dividends while they are
interest in the case of debt capital. The interest payments on debt
capital take priority over the dividend payments on preference share
capital.
Preference share may be redeemable after certain years or they
may be irredeemable. The cost of redeemable preference share capital
may be determined by solving for kp in the following equation:
Po + D1 + D2 + Dn(1+kp) (1+kp)2 (1+kp)n
For irredeemable preference share capital the cost of capital is
kp = D Po
Where D is the stated annual dividend and Po is the net proceeds
of the preference share issue. Here the aftertax cost of capital has not
been calculated because preference dividends are paid after taxes i.e.
they are not tax deductive as in the case of interest payments in respect
of loan stocks.
On most occasions’ preference shares are treated as if they are
issued in perpetuity, therefore their cost of capital is
Kp = DPo
Cost of convertible loan stock is generally between that on straight
debt capital and that on equity capital because a convertible loan stock
has a risk that is somewhat higher than that on a straight bond but
somewhat lower than that on an equity capital. A convertible loan stock
is a hybrid of debt capital and equity capital. This, in a sense, makes the
computation of the cost of convertible loan slightly more complex, but it
can be determined by solving for kc in the following formula:
NM = I (1 – T) + TV
( 1 + kc)t (1 + kc)nt = 1
Where M is the price of the convertible loan stock, I is the annual
interest rate in naira, TV is the expected terminal value of the
convertible loan stock in year N, N is the expected number of years that
the convertible loan stock will be outstanding (i.e. investors’ horizon
period) and kc is the required rate of return on the convertible loan
stock and it is the discount rate that equates the expected aftertax
interest payments or dividends in the case of convertible preference
share, plus the expected terminal value with the offering price of the
convertible security.
The expected terminal value can be represented by the conversion
price, that is, the expected future market price per ordinary share in
some future data (pt) time the conversion ratio, which is the number of
shares into which the loan stock is convertible. Therefore the above
formular can be restated as follows:
NM = Σ I(1 – T) + Pn CR
t=1 (1 + kc)t (1 + kc)NWhere Pn is the conversion price that is, the expected price per
ordinary share at the end of period n and CR is the conversion ratio that
is the number of shares, which the loan stock is convertible.
For convertible preference shares the formula would exclude the
tax element (1 –T). There are practical problems in actually trying to
compute the cost of convertible security. The first is in estimating the
market price per share that will prevail at the end of the horizon period.
Second, is that different investors have different horizon periods, some
attempt to overcome this problem is in trying to specify a weighted
average horizon period, but a better solution lies in estimating the
length of time the convertible securities are likely to remain outstanding.
Once the horizon period has successfully been determined, the market
price at the end of the period can be estimated. Third, do investors
perceive the estimating the market price?
COST OF EQUITY CAPITAL
The cost of equity capital may be defined as the rate of return
required by investors at the margin on the equity – financed portion of
an investor proposal, holding constant the capital structure, business
risk, and dividend policy of the firm.
The cost of equity capital can be derived from the valuation model:
Po + D1 + D2 + +Dn(1+Ke) (1+Ke)2 (1+Ke)n
ooM = Σ Dt
t=1 (1 + Ke)tWhere Po is the value of an ordinary share at time O, Dt is the
dividend per share expected to be paid in period t, and Ke is the rate of
discount appropriate for the businessrisk complexion of the company. If
the dividend is expected to be constant every year perpetually the above
equation becomes:
Po = DKe
Ke = DPo
The foregoing is a poor measure of cost, as it does not allow for any
growth. If, on the other hand, dividends per share are expected to grow
at a constant rate, g and Ke is greater than g, from the valuation
discussed in previous section we know that
Po = D1Ke g
Where D1 is the dividend per share expected to be paid at the end
of period 1, then the cost of equity capital is expressed as follows:
Ke = D1 + gPo
The foregoing equation assumes that the ordinary shares can be
issued at the appropriate market price without the firm incurring any
flotation expenses and any under pricing or market discount on the
shares. This is not always true as many firms that sell a new issue of
shares to the general public always find out that the issue had to be
priced below the current market price in order to make it attractive and
moreover, placing the issue always involve flotation costs. If the flotation
cost cum the market discount are expressed as a percentage, F, of the
gross price of the ordinary shares, Po, we may then express the cost of
equity capital, given constant growth in dividend; as follows:
Ke = D1 + g Po (1 – F)
The cost of equity capital where flotation and market discount are
taken into account is higher than where these are ignored. Also the
foregoing equations are only suitable where companies pay reasonable
but highly unsuitable for companies that either pay no dividends or pay
a negligible one. In such cases the cost of equity can be expressed as
follows:
Ke = Pn Po Po
Where Pn is the market price at period n,:. Pn – Po is the capital gain
expected due to the growth in the market price of the share in the
future.
Keown, Scott, Martins, and Petty (1985) described the
maximization of the firm’s shareholders wealth as the maximization of
the firm’s total value of its common stock. In the valuation of a firm’s
stock, the underlying principle is that of the fundamental theory of
share values which stipulate that the market value of a share is a
function of the future income stream to be earned by such a share,
including the terminal disposal value of the share, all discounted to the
present value, at the investor’s rate of time preference for money, or the
opportunity cost of the investment. (Duran, 1952).
The financial market places an emphatically heavy premium on
current and recent past earnings in forming impressions about future
returns. This notion would invariably and inevitably indicate that a
company that had a high return to its shareholders in the past, would
invariably be faced with penalties in future capital rationing, in that its
calculated cost of capital, and subsequently the cutoff rate for future
investments, would be high, and thereby reducing its profitable
investment opportunities. This seemingly paradoxical concept would
imply two things, viz:
i) The estimate of cost of capital will be based partially on current
yields, so that once the returns the shareholders have been receiving are
known, the share price of the company would rise and therefore bring
down the yield and part of the cost of capital.
ii) The oftendiscredited notion that past growth rates indicate
something about future growth rates cannot be completely ignored; this
is because many investors believe in this notion. A company with high
potentials and expectations for good performance would undoubtedly
disappoint its shareholders with only average returns. Its cost of capital
might consequently shoot up in order to satisfy and retain the
confidence of investors who provide the funds.
TRANSACTION COSTS
Secondary market fees in the Nigerian capital market stand at
about 3.875 percent of an offer proceeds and primary market fees take
about 7.54 percent of the proceeds. A comparative study done by a
London based ban on actual cost of transactions on some African
markets showed that fees payable to regulatory authorities remain
highest in Nigeria than in other stock exchanges while some regulatory
agencies in other parts of the world do not charge any fees at all. For
instance, the regulatory authorities in Botswana do not charge fees for
transactions on it stock exchange. Ghana, Kenya, Mauritius, Tunisia,
Ivory Coast and Zambia charge between 0.5 and 0.25 percent while
Nigeria charges 1.11percent.
Obaseki (2004) said high transaction cost hinder liquidity in the
market because it makes the market less competitive when dealing with
foreign portfolio investors. This serves as a disincentive to stockholders
who do all the work but earn less than the regulators. Moreso, market
making could not thrive under such high costs because high costs stifle
fixed income market.
The significant proportion of these costs go to the government in
form of tax and regulatory fees, while the statutory fees are fixed, fees
due to operators are negotiable. The high cost of transaction in the
market was one of the reasons that delayed the listing of the first
Federal Government N150 billion bonds as well as the low transaction in
it in the secondary market since it was listed. This is because stock
brokers argued that SEC, the capital market’s apex regulatory body,
would get more money than them in terms of fees whereas they were the
people that would engage in marketing of the bond.
The capital market is a source of cheap funds 4 to 9 percent
interest rate when compared to 18 to 21 percent in the money market.
Under the Investments and Securities Act (ISA), the cost of a
primary market issue should not exceed10% of the expected proceed of
the issue. In reality, perhaps to forestall under subscription, costs are
usually in the order of 6% maximum (apart from the marketing and
advertising costs). Of this, about 3% goes to the regulators (SEC and
NSE) as fees. The balance is shared between the coteries of adviser:
issuing house, stockbrokers, registrars, lawyers and accountants.
2.6 EFFICIENCY IN CAPITAL MARKET
Fama (1976) posited that capital market is efficient if prices “fully
reflect” all available information. The concept of efficient market theory
examines relationship between quoted share prices and published
information. There are four schools of thought in relation to these
theories.
I) TECHNICAL ANALYSIS SCHOOL OR CHARTISTS THEORY
Technical analysis, in essence, involves the study of historical price
and volume data either for one stock or a group of stocks and deducing
the future trend from this analysis. That is, the technicians endeavour
to predict future price levels of a stock by examining the past data from
the market itself. The underlying philosophy of technical analysis is
that the price of a stock depends on supply and demand in the market
place and has little relationships to intrinsic value, as the
fundamentalists believe it to be. Supply and demand, in turn, are
influenced by numerous factors both rational and irrational. The result
is price movement that follows trends for appreciable length of time.
However caused, these shifts are detectable sooner or later in the action
of the market. Levy (1966), summaries the rationale behind the
technical analysis school:
“The basic assumption of technical theorists is that
history tends to repeat itself. In other words, past
patterns of market behaviour will recur in the future
and can thus be used for predictive purpose. In
statistical terminology, the stock market technician
relies upon the dependence of successive price
changes”.
The Dow Theory, named after its creator Dow (who established the
Wall Street Journal), is the grandfather of most technical analysis. The
aim of the Dow theory is to identify longterm trends in stock market
prices. The two indicators used are the Dow Jones Industrial Average
(DJIA) and the Dow Jones Transportation Average (DJTA). The DJIA is
the key indicator of underlying trends, while the DJTA usually serves as
a check to confirm or reject that signal.
The Dow Theory posits three forces simultaneously affecting stock
prices:
1) The primary trend is longterm movement of prices, lasting from
several months to several years.
2) Secondary or intermediate trends are caused by shortterm
deviation of prices from the underlying trend line. These
deviations are eliminated via corrections, when prices revert
back to trend values.
3) Tertiary or minor trends are daily fluctuations of little
importance.
The Dow Theory is based on a notion of predictably recurring price
patterns. Yet the Efficient Market hypothesis (EMH) holds that if any
pattern were exploitable, many investors would attempt to profit from
such predictability, which would ultimately move stock prices and cause
the trading strategy to selfdestructive. Other chartist techniques involve
moving averages. In one version of this approach average prices over the
past several months are taken as indicators of the “true value” of the
stock. If the stock price is above this value, it may be expected to fall.
In another version the moving average is taken as indicative of longrun
trends. If the trend has been downward and if the current stock price is
below the moving average, then a subsequent increase in the stock price
above the moving average line (a “breakthrough”) might signal a reversal
of the downward trend. Another technique is called the relative strength
approach. The chartist compares stock performance over a recent
period to performance of the market or other stocks in the same
industry. A simple version of relative strength takes the ratio of the
stock price to a market indicator such as the S & P 500 index. If the
ratio increases over time, the stock is said to exhibit relative strength
because its price performance is better than that of the broad market.
Such strength presumably may continue for a long enough period of
time to offer profit opportunities.
Technical analysts also focus as on the volume of trading. The idea
is that a price deficit accompanied by heavy trading volume signals a
more bearish market than if volume we smaller, because the price
decline is taken as representing broaderbased selling pressure. Trading
index (trin statistic) is the ratio of average volume in declining issues to
average volume in advancing issues. Ratios above 1.0 are considered
bearish because the falling stocks would then have higher average
volume than the advancing stocks, indicating net selling pressure. Note,
however, that for every buyer there must be a seller of stock. High
volume in a falling market should not necessarily indicate a larger
imbalance of buyers versus sellers. For example, a trin statistic above
1.0, which is considered bearish, could equally well be interpreted as
indicating that there is more buying activity in declining issues.
Suppose, for example, that the Dow Theory predicts an upward primary
trend. If the theory is widely accepted, it follows that many investors
will attempt to buy stocks immediately in anticipation of the price
increase; the effect would be to bid up prices sharply and immediately
rather than at the gradual, longlived pace initially expected.
II) FUNDAMENTALIST OR TRADITIONAL THEORIES
Fundamental analysis uses earnings and dividend prospects of the
firm, expectations of future interest rates, and risk evaluation of the
firm to determine proper stock prices. Ultimately, it represents an
attempt to determine the present discounted value of all the payments a
stockholder will receive from each share of stock. If that value exceeds
the stock price, the fundamental analyst would recommend purchasing
the stock. Fundamental analysts usually start with a study of past
earnings and an examination of company balance sheets. They
supplement this analysis with further detailed economic analysis,
ordinarily including an evaluation of the quality of the firm’s
management, the firm’s standing within the industry, and the prospects
for the industry as a whole. The hope is to attain insight into future
performance of the firm that is not yet recognised by the rest of the
market. If the analyst relies on publicly available earnings and industry
information, his or her evaluation of the firm’s prospects is not likely to
be significantly more accurate than those of rival analysts. There are
many wellinformed, wellfinanced firms conducting such market
research, and in the face of such competition it will be difficult to
uncover data not also available to other analysts. Only analysts with a
unique insight will be rewarded. Fundamental analysis is much more
difficult than merely identifying wellrun firms with good prospects.
Discovery of good firms does an investor no good in itself if the rest of
the market also knows those firms are good. If the knowledge is already
public, the investor will be forced to pay a high price for those firms and
will not realise a superior rate of return. The trick is not to identify
firms that are good, but to find firms that are better than everyone else’s
estimate.
Poorly run firms can be great bargains if they are not quite as bad
as their stock prices suggest. This is why fundamental analysis is
difficult. It is not enough to do a good analysis of a firm; you can make
money only if your analysis is better than that of your competitors
because the market price will already reflect all commonly available
information.
The fundamental analysis school maintains that at any point in
time an individual security has an intrinsic value which should in
principle, be equal to the present value of the future stream of income
from that security discounted at an appropriate riskrelated rate of
interest. The actual price of a security, therefore, is considered to be a
function of a set of anticipated returns and anticipated capitalisation
rates corresponding to future time period. Prices change as
anticipations change, which in turn changes as a result of new
information. The fundamentalists, thus, argue that in case there is
“something less than complete dissemination of information, the actual
price of a security is generally away from its theoretical value” (Fisher
and Jordan 1975). That is, they believe that the market can very often
be wrong in appraising the value of a company.
Relying upon this reasoning, the fundamentalists attempt to
estimate the real worth of a security considering key economic and
financial variables and then decide as to what investment action is
called for in a given situation depending upon whether the actual price
is above or below its intrinsic value. For instance, if the market of a
security is below its intrinsic value, it should be purchased. A selling
decision is called for when the prevailing price is above the intrinsic
value. The fundamentalists believe that the market will eventually see
“the error of its ways” (Dreman, 1977) and by following this policy – an
above – average market performance can be obtained. Ekpenyong (1997)
explained that fundamentalist approach “bases the valuation of
securities on the equality between the price of a security and the
discounted value of the stream of income from the security”. For
instance, he noted that variables including earnings, dividends, asset
values and management among others are essential in determining the
underlying values of securities.
This entails studying the fundamental of a company, i.e. looking at
its earnings record, earning projections, assets structure, dividend
record, growth record, and cashflows to determine the intrinsic value of
securities. The price of a security is a function of the cash flows
expected from a security.
For a security generating fixed return the valuation is given as:
^Po = ∑ Ct + MV
t=l (1 + Kd)t (1 + Kd)n
Where Po = market price of the fixed return instrument at time zero
C = periodic return or coupon or interest payment on the
fixed return instrument
MV = maturity value of the fixed return instrument.
Kd = cost of debt or yield to maturity or required rates of
return or assumed reinvestment rate or internal rate of return.
^ = Number of periods to maturity
Where the fixed return instrument is irredeemable,
Po = CKd
For variable return security (ordinary shares), the valuation is given as:
Po = D1
Ke – g
Where D1 = dividend at period 1.
g = constant growth rate.
Thus, the main difference between technical and fundamental
approaches is that while the technical analysts ignore all of the
fundamental factors that are central to the fundamentalists’
determination of security value and concentrate on the market
information, which is not of much consideration to the fundamentalist.
That is, to true fundamentalists, market information is a secondary
consideration, as he believes that price will “eventually” return to true
value.
III) THE RANDOM WALK THEORY
In essence, the efficient market school or random walk theory
hypothesis of stock market prices is concerned with the question of
whether one can predict future prices from past prices. In its simplest
form it states that changes cannot be predicted from earlier changes in
any “meaningful” manner. The fundamental ideas behind the random
walk hypothesis are that successive price changes (or successive one
period returns) in individual securities are independent over time and
that its actual price fluctuates randomly about its intrinsic or
theoretical value. This would imply that price changes occur without
any discernible trends or patterns and that past prices contain no
useful information as to their future price behaviour. Fama (1965), the
most ardent advocate of the hypothesis observes:
“…The theory of random walks implies that a series
of stock price changes has no memory – the past
history of the series cannot be used to predict the
future in any meaningful way. The future path of the
price level of a security is no more predictable than
the path of a series of accumulated random
numbers”.
This means that at a given point in time the size and direction of
the next price change is random with respect to the stock of knowledge
available at that point in time and that the “… best predictor of
tomorrow’s price is today’s price”. This implies that past history of
share prices will not enable an investor to obtain an above average
return. In the words of Fisher (1971) the past history of stock price
movements, and the history of stock trading volume, do not contain any
information that will allow the investor to do consistently better than a
buyandhold strategy in managing a portfolio”. With the independence
assumption, it is often additionally assumed that successive price
changes or returns are identically distributed. Thus, the strict form of
the random walk model states that (a) successive price changes or
changes in returns are independent and (b) price changes or returns
are identically distributed according to some stationary distribution.
Formally the strict form of the random walk model stated in terms
of returns may be written as:
f(rj, t + I rj, t, rj, t – l, rjt – 2 …) = f(rj, t + l) where f(rj, t + l)
denotes the probability distribution of returns for security j at period t
+ l . The above expression implies that the conditional and marginal
probability distributions of an independent random variable are
identical. In other words, the above equation says that the entire
distribution of returns is independent of the proceeding sequence of
returns. Fama 1965 note that “any distribution is consistent with the
theory as long as it correctly characterises the process generating the
price change”. However, knowledge of the form of distribution of price
changes is important for both investors and researchers for determining
riskiness of investment in common stocks. But the model when stated
in terms of predictability of price changes from earlier changes need not
be specific about this distribution (Granger and Morgensterm, 1970).
It is noteworthy that the proponents of the random walk theory
recognise that stock price movements are not strictly independent.
However, they argue that a small degree of dependence in successive
price changes does not reject the practical utility of the theory of
random walks since the same may not be useful to make money in the
stock market. Thus, for the stock market trader or investor, “the
independent assumption of the random walk model is valid as long as
knowledge of the past behaviour of the series of price changes cannot
be used to increase expected gains” (Fama, 1965). That is, for practical
purposes, the model may be considered to be appropriate as long as the
degree of dependence in a series of price changes is not sufficient to
predict future price changes from past price changes so as to make
expected profits greater than they would be under a buyandhold
policy. Ekpenyong posited that the randomwalk model is hinged on
the basis that the stocks “are always in equilibrium and that it is
impossible for an investor to consistently beat the market”. Essentially,
he noted that there is need to have a clear idea of the rate of return
investors require in order to undertake the risks of common stock
investment. Thus, appraising stock pricing on the Exchange, brokers
are incapacitated by many factors such as lack of where withal to
collect data, problem of reliability of data, limited access to information,
lack of equipment and unstable macro economic environment.
Mobolurin (1997) identified factors that bring about imitation stock
pricing as: sentiments; artificial support for a security price; industry
bias; and knowledge of operators. To him however, competent brokers
base their pricing on the knowledge of the economy and research and
not arbitrary pricing. According to Adeniji (1997) brokers should not
base their stock pricing on companies balance sheet rather they should
look for information about companies through informal sources. He
also pinpointed some variables that brokers must consider in marking
share prices. They include: supply and demand for the company’s
shares; management style; the company’s export drive; production
stoppages; government regulations; product appeal and aggressive
marketing, exchange rate policy; and local sourcing of raw materials.
Onosode (2001) maintained that irrespective of the method of share
pricing, brokers should base their pricing on sound judgment and
proper utilisation of available information about quoted companies and
to uphold the tenet of their profession and that only stable macro
economic environment can make it valid.
IV) THE THEORY OF EFFICIENT CAPITAL MARKET
The efficiency of a capital market connotes its ability to react
promptly and reasonably to available information and being able to price
securities fairly in consideration of such information. An efficient
capital market is one where there exists enough buyers and sellers,
where there is free entry to and exit from the market, where there are no
transaction costs or where they exist, they are negligible and where
there is free flow of information obtainable by all at no cost. Markets are
efficient if the net present values (NPVs) of all these transactions are
zero. If transaction costs are zero and all investors have access to the
same information, then competition will eliminate opportunities for
earning positive NPVs. All available information would be incorporated
into prices. The efficient market hypothesis relates to information
processing – the extent to which information regarding the future
prospects of a security is reflected in its current price. The efficient
market hypothesis agues that stock markets are efficient, in that
information is reflected in share prices accurately and rapidly.
Efficiency in the stock market in essence is achieved when any
information relevant to a firm is fully and immediately absorbed in its
share price. In reality it is very rare to find such a market that meets all
the foregoing characteristics. Thus, the capital market efficiency was
defined in three forms, each specifying different interpretation of the
influence of eligible information. They are:
a) The weak form efficiency
b) The semistrong efficiency
c) The strong form efficiency
Weak Form Efficiency Markets
A market is said to be weakform efficient if current prices reflect
all information contained in past prices. This form of efficiency is weak
because it requires only a small amount of information to be
incorporated into prices. Its implication is nonetheless very powerful. If
markets are weakform efficient, then past prices cannot predict price
movements in the future i.e, it rules out trends, cycles or any other
predictable pattern of price movements. Hence, if markets are weak
form efficient there is no scope for profitable technical trading rules,
since they are based on information that is already reflected in market
prices. In fact, a very simple forecasting rule applies: the best predictor
of tomorrow’s stock price is today’s price. More formally, this result is
known as the “random walk hypothesis”. Tomorrow’s price Pt + 1 can be
expressed as today’s price, Pt plus a random expectation error Σt + 1
which has an expected value of zero.
Pt + 1 = Pt + Σt + IE (Σt + I) = O
In a weak form efficiency the capital market reacts only to publicly
available information to price securities. Hence in this market, sharp
operators can use this information otherwise not publicly available to
their advantage and make profit. Weak form hypothesis of market
efficiency also explains changes in share prices as the result of new
information which becomes available to investors i.e. share price only
change when new information becomes available and not in anticipation
of new information.
Semi Strong Form Efficiency
A market is said to be semistrong form efficient if all publicly
available information is reflected in market prices. This requires that no
investor can consistently improve his or her forecast of future price
movements simply by analysing macroeconomic news, earnings
statements, annual reports or other publicly available sources. Semi
strong efficiency explains that current share price reflect both all
relevant information about past price movement and their implication
but also all knowledge which is available publicly and which is relevant
to the valuation of the share.
Strong Form Efficiency
A market is strongform efficient if all relevant information (public
or private) is reflected in market prices. This definition is the most
stringent one, since it implies that nobody can ever profit from any
information, not even inside information or the information produced by
the highly original analyst. In a strong form efficient market prices
adjust instantaneously to orders based on private information. Strong
form efficiency proves that prices reflect all information available from
past price changes; from public knowledge/anticipation; and also from
insiders’ knowledge available to specialists or experts. If the strong form
hypothesis is correct a company’s real financial position will be reflected
in the share price. The real financial position includes both its current
position and its expected future profitability.
Husnan and Theobald’s (1993) findings of a study on “Thin Trading
and Index Sensitivity in the Indonesian capital market showed that the
market seems not to be efficient in the semistrong form sense, since
abnormal returns could still be achieved several weeks after possible
release of new information”. The presence of such inefficiencies will
further obscure the measurement of price reactions to information
disclosure. They went further to say that “the inefficiency of the Jakarta
Stock Exchange is obvious in the fact that several securities companies
frequently differ widely on their predictions on expected EPS and Price
earnings ratio. Stock investors therefore do not pay much attention to
such predictions and many investment decisions are based mostly on
speculations.” This inefficiency was loosely explained by market
conditions and institutional aspects of the market. This shows that
price may be an effective indexa reflective one, only, if the computation
is right. For developing countries like Nigeria therefore when one talks
of responsiveness of stockholders to changes in price, one wonders
whether stockholders are reacting to the right signal.
The reappraisal of roles of the capital market authorities become
extremely important and relevant when it is remembered that the
success of these authorities (i.e. SEC and NSE) would accelerate the
process of account growth and development of the nation while their
failure could lead to perpetual underdevelopment. Apart from creating
facilities for raising funds for investment in longterm assets, an efficient
capital market is expected to make the following contributions towards
economic growth and development: a) Mobilise idle savings on; b)
Allocate resources more efficiently; c) Provide liquidity and solvency for
the corporate sector; d) decentralise ownership of wealth e) improve
tax collection in the longrun; f) improve accounting auditing and
reporting standards; g) encourage promoter/nonpromoter management
transition. Adewunmi (2000).
As Robbins explained, “capital markets are efficient when they
contain… a great many rational investors who desire to increase their
profits and therefore vigorously compete with each other to predict the
prices of securities on the basis of information freely available to all
participants”. Few tests of capital market efficiency have been carried
out using data from the Nigerian capital market. Ayadi (1984) used the
WaldWolfowitz runs test to examine the weakform efficiency of the
Nigerian Securities Market. He concluded that “share price behaviour or
movement in Nigeria follows a random walk”. This finding reinforces the
conclusion reached by Samuel and Yacout (1981) that successive stock
prices in Nigeria are orthogonal. But Inanga and Asekome (1992)
questioned the validity of the methodology employed in the two studies.
They argue that the findings of Ayadi (1984) could have been biased
because the author excluded zero runs in the test. This exclusion
constitutes a serious weakness to the study considering the finding of
Inanga (1990) that many stocks in the market record zero price changes
over any trading period as a result of the buyandhold attitude of
investors. Samuels and Yacout (1981) are criticised for using twoweek
lag structure, which is considered long and small sample size, in the test
to serial correlation of stock prices.
In their test of the efficiency of the stock market, Inanga and
Asekome (1992) applied both the Box and Pierce (1970) Qtest and the
number of runs test to analyse serial correlation of stock prices. The
study concluded that the market is “weakly efficient” in the weak form
level. It therefore affirmed the view of Granger and Morgenstern (1993)
that the random walk hypothesis is “an average kind of law” which may
not necessarily hold for all securities at all times.
There is yet no definite finding on the semistrong and strong forms
of efficiency of the Nigerian securities market. An attempt at the semi
strong test by Emenuga (1989) using money supply information found
that the structural efficiency of the stock market could not be
determined using monetary data since there is no empirical relationship
between money supply and stock prices. Thus tests of semistrong and
strong forms of efficiency of the Nigerian securities market still remain
outstanding research agenda.
Capital Market Line
According to Freear (1980), a capital market line would be
established such that all efficient portfolios (i.e. preferred tradeoffs
between risk and return) lie on the capital market line:
Rp = F + Rm – F pδ mδ
Where Rp is the expected return on a portfolio, F is risk – free rate; Rm
is the expected return on the market portfolio; m is the standardδ
deviation of the market portfolio; p is the standard deviation of theδ
portfolio under consideration.
Risk (Standard deviation) (Percent)
Expected return (percent)
F
O
M
CML
Figure 2.1 Capital Market Line (CML).
The positive linear relationship between risk and expected return
holds, under the assumptions, for all efficient portfolio. It does not, of
course, hold for individual risky securities. If it did, there would be no
benefits from diversification.
2.7 EMPIRICAL STUDIES OF CAPITAL MARKET IN OTHER
COUNTRIES AND IN NIGERIA
Studies on the interrelationship of the stock market with
macroeconomic variables have been conducted for the Indian economy
among others Naka et al; Sharma and Kennedy, 1997, Sharma, 1983,
Darrat and Mukheriee, 1987. While some of these studies focused on the
stock market and aspects of the Indian economy, the work of Darrant
and Mukerjee (1987) used the vector auto regression model (VAR) to find
a causal relationship between stock returns and some macroeconomic
indicators. The work of Naka et al in studying the cointegrating
variables and the stock market returns, in avoiding possible
misspecification problems in the VAR technique, used the VECM which
has been widely used for examining cointegrating relationships among
financial variables.
Levine and Zervos (1996) examines whether there is a strong
empirical association between stock market development and longrun
economic growth. The study used pooled crosscountry timeseries
regression of fortyone countries from 1976 to 1993 to evaluate this
association. The study tow the line of DemirgueKunt and Levine (1996)
by conglomerating measures such as stock market size, liquidity, and
integrating with world markets, into index of stock market development.
The growth rate of Gross Domestic Product (GDP) per capita was
regressed on a variety of variables designed to control for initial
conditions, political stability, investment in human capital, and
macroeconomic conditions; and then include the conglomerated index of
stock market development. The finding was that a strong correlation
between overall stock market development and longrun 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.
Efforts were also made by Nyong (1997) to develop an aggregate
index of capital market development and use it to determine its
relationship with longrun economic growth in Nigeria. The study
employed a time series data from 1970 to 1994. For measures of capital
market development the ratio of market capitalisation to GDP (in
percentage), the ratio of total value of transactions on the main stock
exchange to GDP (in percentage), the value of equities transaction
relative to GDP and listings were used. The four measures were
combined into one overall composite index of capital market
development using principal component analysis. A measure of
financial market depth (which is the ratio of broad money to stock of
money to GDP) was also included as control. The result of the study
was that capital market development is negatively and significantly
correlated with longrun growth in Nigeria. The result also showed that
there exists bidirectional causality between capital market development
and economic growth.
Ziorkhui et al (2001) carried out their study on capital market
development and growth in subSaharan Africa: focusing on Tanzania.
The objective of their study was to examine the various problems that
constrain the development of functioning capital market. Parametric
statistical analysis was adopted in testing various hypotheses. The
study found out that policy changes in Tanzania have had positive
impact and challenges on the capital market development; that in
normal terms, Tanzania experienced economic growth throughout the
period 1986 to 1998.
Adebiyi (2003) empirically investigates the direction of causality
between index of industrial production and some indicators of
development in the Nigerian stock market using annual time series data
from 1980 to 2002. He examined stochastic characteristics of each time
series by testing their stationarity using Augmented Dickey Fuller
(ADP) and Phillip Perron (PP) tests. Then, the effects of stochastic
shocks of each of the endogenous variables are explored, using Vector
Auto regression (VAR) models and impulse response analysis. He also
used Granger causality test, which shows that none of the indicators of
development in the Nigerian capital market, including savings rate,
Granger – cause the index of industrial production. The impulse
response analysis shows that while market capitalisation ratio and
number of listed companies positively ffect the index of industrial
production0, it is negatively influenced by the ratio of securities traded
to gross domestic product and savings rate. Thus, while increase in
market capitalisation ratio and number of listed companies will raise
index of industrial production in Nigeria, the ratio of securities traded to
gross domestic product and savings rate will reduce it.
2.8 ECONOMIC GROWTH THEORIES
Economic growth implies the expansion of an economy, an increase
in the aggregate value of goods and services produced over a period of
time. It is usually defined in relation to the capacity of the economy to
produce real net output. Output grows only when the extent to which
productive capacity are utilised increases and/or the capacity itself.
Thus, in explaining the rate of capacity growth, the roles of capital
accumulation, technical improvement and the rate of growth of the
workforce cannot be overemphasised. Improving productive technique
consists of bringing about a change in productive methods that for any
given factor input a larger output could be obtained. This usually
involves two processes:
i) The development of knowledge i.e. invention, which is used in
production would permit a greater output from a given input
combination.
ii) Application of this new technique, to the actual process of
production. To increase the rate of growth of productive
technique the rates at which those processes are taking place
first need to be increased.
The growth of output is not, of course, the only goal of economic
policy in developing countries, but policies to raise the rate of output
growth form the major part of most countries development plans,
because: (1) growth is seen as a necessary condition for an improvement
in the general welfare and because (2) growth is seen as the
precondition for the achievement of other development objectives such
as the provision of greater employment opportunity, the redistribution of
income and wealth, and the provision of social capital in the form of
housing, communications and facilities for the development of human
resources. (ThirWall 1978).
ThirWall (1978) further posited that growth requires real resources
devoted to the production of capital goods; where capital goods are
defined broadly to include industrial plant, machinery, social overhead
capital; educational facilities – indeed the production of anything which
is not immediately consumable but yields a flow of income in the future.
Real resources for capital formation come from three main sources: first,
there are resources released domestically by abstinence from present
consumption; secondly, there are resources released by trade; and
thirdly, there are resources transferred from abroad in the act of
international giving or lending. Like Smith, Ricardo believed that
growth resulted from what he called “accumulation”, that is from capital
formation. But capital formation (or investment) was a function of
profits in an economy where government was not an important investor
or participant. Profits depended on wages, which in turn depended on
the prices of “wage goods”. Economic growth can be viewed as a
function of the marginal propensity to save and the capital/output ratio.
In algebraic terms, where Y is national income, K is capital, I is net
investment (the change in the capital stock from one period to the next,
S is savings, and changes from one period to the next are represented by
∆, then the growth rate G = ∆Y/Y, the saving ratio s = S/Y and (since
I = S) = I/Y. By definition, investment is the change in the capital
stock.
∆k = Iand, similarly; the incremental capital/output ratio is defined as:
k = ∆K I ∆Y ∆Y
Then since ∆Y I/Y Y I/∆Y
the growth rate
=
=
G = s/k
Or the rate of growth is equal to the savings ratio divided by the
incremental capital/output ratio. Growth, according to this
formulation, can be increased either by expanding the proportion of
national income saved or by lowering the capital/output ratio. The
latter is equivalent to increasing the effectiveness with which the capital
stock is used to produce output.
Growth can be expressed as the product of a country’s ratio of
investment to output (I/O) and productivity of investment (∆o/I) i.e.
Growth = ∆o = I ∆OO O I
The measurement of resource requirements for development is to
use the growth formular, g = s/c, where g is the growth of output (∆Y/Y),
s is the savings ratio (∆K/Y), and c is the incremental capital – output
ratio (∆K/∆Y).
In Nigeria’s search for growth, it would be necessary to discard
false panaceas and instead apply the principle that “people respond to
incentives”. Among the false panaceas that have been discarded as
incompatible with “people respond to incentives” are:
i. Filling the financing gap;
ii. Reliance on human and physical capital accumulation alone;
=
and
iii. Structural adjustment without adjustment.
Empirical evidence on growth and policy bears out the prediction
that if incentives for the private and public sector to invest in the future
are good, then growth will happen; if incentives are poor, growth will not
happen. Let us examine briefly the above three false panaceas filling
the financing gaps.
Early development economists however used the Domar’s model
(HarrodDomar model) to calculate the financing gap that needed filling
if an economy was going to develop. There is the prediction that growth
will be proportional to the investment ratio; specifically, growth will be
equal to investment divided by the Incremental Capital Output Ratio
(ICOR). The financing gap is the gap between available financing for
investment (e.g, domestic saving) and the required investment. This gap
could be financed with aid. The evidence for the financing gap approach
has been found to be as weak as the theory.
Factors of Economic Growth (Economic and NonEconomic)
Two types of factors, economic and noneconomic, influence the
process of economic growth. The economic growth of a country is
dependent upon its natural resources, human resources, capital,
enterprise, technology and so forth. But economic growth is not
possible so long as the social institutions; political conditions and moral
values in a nation do not encourage growth. The social institutions,
cultural attitudes, moral values, institutional and political conditions
are noneconomic factors in economic growth. As posited by Bauer
(1973), the main determinants of economic growth are notably
aptitudes, abilities, qualities, capacities and faculties, attitudes, mores,
values, objectives and motivations, and institutions and political
arrangements.
The subject of financing economic growth relates to the provision of
real resources to raise the level of real output (national income) and
living standards (income per head) in developing countries like ours.
The growth of output is not, of course, the only goal of economic policy
in developing countries, but policies to raise the rate of output growth
form the major part of most countries’ development plans, because (1)
growth is seen as a necessary condition for an improvement in the
general welfare and because (2) growth is seen as the precondition for
the achievement of other development objectives such as the provision of
greater employment opportunity, the redistribution of income and
wealth, and the provision of social capital in the form of housing,
communications, and facilities for the development of human resources.
Although it has become fashionable for the international middle class to
renounce growth, it remains, in the absence of a massive redistribution
of world income, the only means of eradicating primary poverty which
still afflicts at least twothirds of humanity.
Economic growth requires real resources devoted to the production
of capital goods, where capital goods are defined broadly to include
industrial plant, machinery, social overhead capital, educational
facilities – indeed the production of anything which is not immediately
consumed but yields a flow of income in the future.
2.9 THE IMPORTANCE OF CAPITAL MARKET TO THE NIGERIAN
ECONOMY
The disequilibrum in savings and investment needs of economic
units and the resultant desire to channel savings of surplus units into
productive investments by deficit units are undoubtedly the main
essence of capital market development. In other words, the capital
market plays an intermediation role by creating the facilities for he
translation of savings into investment, thus enhancing economic growth
and development to enable such transfer, the capital market trades in
financial assets – stocks, bonds etc. which are long term in duration.
The stimulation of economic growth and development is just one of
the many benefit of the capital market to any nation but it is perhaps
the most important. There are also micro benefits to corporate bodies
and social benefits to the people as a whole. Without a secondary
market which creates the avenue for easy transfer of existing investment
(assets) to confer liquidity on the instruments, the capital market would
not be attractive to both investors in and indeed issuers of securities.
One important advantage of more companies being quoted on the
Stock Exchange is that it makes business more efficiently and with
greater possibility that the company will remain profitable. This would
make the company to employ the services of more workers and vendors.
The company is also expected to pay more taxes into the coffers of
government. This way, the company’s success has a ripple or SPMoff
effect on the economy of the nation. The aggregate effect of more and
more companies being quoted naturally multiples these advantages
across the spectrum of the economic landscape.
The capital market is known to have been used as an instrument of
implementing certain government reform programmes such as
privatization and debt conversion. Nigeria is an example in which
divestment of government holdings under its ongoing privatization
programme has been utilized to facilitate additional listings on stock
exchange.
According to Alile (2005), the capital market today fulfils the
following roles within an economy:
It provides a means for raising longterm finds to assist governments
and companies to execute their development projects, modernization
and expansion programmes; it provides a means for allocating the
nation’s real and financial resources between various industries and
companies; it enhances the state of having assets that can easily be
changed into cash for the investment funds from the stand point of
individuals for the economy; it is a measure of confidence in the
economy and serves as an important measuring instrument for the
economy.
2.10 THE LINKAGE BETWEEN CAPITAL MARKET AND ECONOMIC
GROWTH
What role can capital markets play in economic growth? Like all
financial markets they link “deficit unitpeople, enterprises, or
governments which want more funds than they currently have to
surplus units”, which have more funds than they currently need. The
term securities markets provide a meeting place for investors and
borrowers who want to invest money in business (real productive assets)
and the savers and lenders who seek financial returns. The users of
capitalgovernment and business are the issuers of securities, whereas
the providers of capital are the buyers of securities. According to
Usman (1998) the securities or capital market can be classified into
primary (i.e. new issues of securities) and secondary (trading in old
issues of stock) markets. The essence of the securities market is not
only to generate the capacity for the supply of longterm capital, but
also to engender an efficient longterm capital by mobilizing domestic
savings through both the new issues market as a primary source and
the trading market as a secondary source, in order to meet the
increasing demands by industry and government for longterm capital
investment. Many people, including some economists, do not think that
secondary markets are important in a fundamental economic sense
because they only shuffle assets (or the ownership of assets) from one
owner to another. This view is incorrect for at least two reasons. First,
the primary newissue markets would probably not exist or would be
much smaller than they are if the secondary markets did not exist to
give liquidity or shiftability to securities after they are first issued.
When one exchanges some of one’s money for a twenty year bond or 100
shares of common stock, one of the most important reasons why one
does so is because if one changes one’s mind tomorrow (or next month
or next year), one can sell the stock or bond to some one else in the
trading market and turn it back into money. Second, secondary trading
markets produce an extremely valuable commodity: information.
Information and liquidity are really the products of secondary markets.
Although many people think that there is too much information in our
world today, that we are in danger of suffering from information
overload, when it comes to investment decisions there never seems to be
enough information. The social function of secondary securities
markets lies in their generation of tremendous amounts of information
on the value of government debts, on the value of corporate bond and
stock issues, on the tradeoffs between present and future income and
consumption, and on the yields and returns of different investments. All
of this information is extremely important for efficiently allocating the
world’s capital. Securities markets contribute to development in that
they increase savings and investment flows and make the allocation of
these flows more efficient. In doing so, they reduce the cost of funds to
borrowers and investors in real productive assets while increasing the
returns to savers, lenders, and financial investors. They accomplish
this by creating liquidity and generating information, thereby
encouraging people to save and invest more.
Gurley and Shaw (1955, 1960) and Goldsmith (1969) indicate that
as economies develop, selffinanced capital investment first give way to
bank intermediated debt finance and later to the emergence of equity
markets as an additional instrument for raising external funds.
Financial structure – the mix of financial intermediaries and markets –
changes as countries develop. Moving from poorer to richer economies,
commercial banks and nonbank financial institutions grew in
importance, while the role of the central bank diminishes.
Furthermore, the financial system allocates more credit to the private
sector as a share of GDP in richer countries, and richer countries tend
to have larger overall financial systems and stock markets as
percentages of GDP than poor countries. McKinnon (1973) argued that
appropriate financial sector reforms expedite growthinducing financial
development.
Although capital market development is a common feature of
financial and economic growth, many analysts view capital markets in
developing countries as “casinos” that have little positive – and
potentially a large negative – impact on economic growth. Other
analysts argued that, because not much corporate investment is
financed through the issuance of equity (Mayer 1988), capital markets
are unimportant for economic growth. Various conceptual arguments
emphasise the potentially positive, neutral or even negative implications
of capital market development for economic growth. In Nigeria, Omole
and Ogunwike (1997) were of the opinion that capital market
development is strongly linked with economic growth while Nyong (1997)
was of the view that capital market development has negative impact on
economic growth. The positive linkage between capital market and
economic growth has been questioned on two main grounds. This is
because greater liquidity of capital market can influence growth through
two main mechanisms.
a) Liquidity, especially when great, may dampen savings rate and
thus a decline in economic growth. This can be as a result of the
income and substitution effects.
b) Liquidity of the capital market may lead to decreased saving rates
as a result of the uncertainty on savings. It is clearly articulated in
the literature that when certainty makes investment more
attractive to especially riskaverse investors, it, at the same time
reduces demand for precautionary savings (Nyong, 1997).
Greenwood and Smith (1996) show that large capital markets can
lower the cost of mobilising savings and thereby facilitate investment in
the most productive technologies. Bencivenga, Smith and Starr (1996)
and Levine (1991) argued that capital market liquidity the ability to
trade equity easily is important for growth. Although many profitable
investments require a longrun commitment of capital, savers do not like
to relinquish control of their savings for long periods. Liquid equity
markets ease this tension by providing an asset to savers that they can
quickly and inexpensively sell. Simultaneously, firms have permanent
access to capital raised through equity issues. Moreover, Kyle (1984)
and Holmstrom and Tirole (1993) argue that liquid capital markets can
increase incentives for investors to get information about firms and
improve corporate governance. Obstfeld (1994) shows that international
risk sharing through internationally integrated capital markets improves
resource allocation and can accelerate the rate of economic growth.
The critical role of financial market liquidity in affecting the
efficiency of physical production enjoys historical support. Hicks (1969)
said that new technological invention did not ignite the industrial
revolution in England in the eighteenth century. Rather, more liquid
financial markets made it possible to develop products that required
large capital injections for long periods before the projects ultimately
yielded profits. Without liquid capital markets, savers would have been
less willing to invest in the large, longterm projects that characterized
the industrial revolution; the industrial revolution therefore had to wait
for the financial revolution. Theoretical disagreement exists, however,
about the importance of capital markets for economic growth. Mayer
(1988) argues that even large capital markets are unimportant sources
of corporate finance. Stiglitz (1985, 1994) says that capital market
liquidity will not enhance incentives for acquiring information about
firms or exerting corporate governance. Moreover, Deverux and Smith
(1994) emphasise that greater risk sharing through internationally
integrated capital markets can actually reduce saving rates and slow
economic growth. Finally, the analysis of Shleifer and summers (1988)
and Morck, Shleifer, and Vishny (1990a, 1990b) suggest that capital
market development can hurt economic growth by easing counter
productive corporate takeovers. Levine and Zervous use of crosscountry
regression to examine the association between capital market
development and economic growth through measures of capital market
development. To them, theory does not provide a unique concept or
measure of capital market development, but it does suggest that capital
market size, liquidity, and integration with world capital markets may
affect economic growth. Consequently, they use a conglomerate index of
overall capital market development constructed by Demirguc – Kunt and
Levine (1996). Capital markets may affect economic activity through
the creation of liquidity. At the same time, companies enjoy permanent
access to capital raised through equity issues. By facilitating longer
term, more profitable investment, liquid markets improve the allocation
of capital and enhance prospects for longterm economic growth.
Further, by making investment less risky and more profitable; stock
market liquidity can also lead to more investment. Put succinctly and
investors will come if they can leave.
There are alternative views about the effect of liquidity on long
term economic growth. Because it is easy for dissatisfied investors to sell
quickly, liquid markets may weaken investors’ commitment and reduce
investors’ incentives to exert corporate control by overseeing managers
and monitoring firm performance and potential. According to this view,
enhanced capital market liquidity may actually hurt economic growth. A
countervailing argument is that stock markets that accurately value
firms improve the efficacy of tying compensation to stock if stock prices
rise, both the managers and the owners benefit, so that managers will
have incentives to maximise firm value (Jensen and Murphy 1990).
Thus, welldeveloped stock markets can help align the interests of
owners and managers and thereby spur efficient resource allocation and
enomic growth. The empirical evidence, however, strongly supports the
belief that greater capital market liquidity boost – or at least precedes –
economic growth. To see how, consider three measures of market
liquidity – three indicators of how easy it is to buy and sell equities.
One measure commonly used is the total value of shares traded on
a country’s stock exchange as a share of GDP. This ratio does not
directly measure the costs of buying and selling securities at posted
prices. Yet, averaged over a longtime, the value of equity transactions as
a share of national output is likely to vary with the ease of trading. In
other words, if it is very costly or risky to trade, there will not be much
trading. The second measure of liquidity is the value of traded shares as
a percentage of total market capitalisation (the value of stocks listed on
the exchange). This turnover ratio measures trading relative to the size
of the stock market. The third measure is the valuetradedratio divided
by stock price volatility. Markets that are liquid should be able to handle
heavy trading without large price swings. The strong link between
capital market liquidity and economic growth continues to hold when
controlling for other economic, social, political and policy factors that
may affect economic growth. What is important is that capital market
size and stock price volatility measures of capital market development
do not tell the same story. For example, capital market size as measured
by dividing market capitalisation by GDP – is not a good predictor of
economic growth, while greater stock price volatility does not necessarily
predict poor economic performance. Empirically, it is not the size or
volatility of the capital market that matters for growth but the ease with
which shares can be traded.
Evidence in more advanced countries and rapidly developing
capital markets of Southeast Asia and Latin American confirm the
overall positive association between capital market development and
economic growth. To capital (securities) market development. These
include (a) mobilisation of longterm savings for longtenured
investments, (b) providing risk capital (equity) to entrepreneurs, (c)
broadening ownership of firms, and (d) improving the efficiency of
resource allocation through competitive pricing. According to Demirguc
– Kunt and Levine (1993) further gains to the economy arise due to
lower cost of equity for firms and the discipline imposed on corporate
managers since movements of share prices reflect managers’
performance, existence of mechanisms for appropriate pricing and
hedging against risk and increased inflows of funds to the thriving
domestic stock market.
Mckinnon (1973, 1991), Gelb (1989) and Fry (1988), Montiel (1996),
among others, stress the positive contribution of capital market
development to growth, while King and Levine (1993) and Ghani (1992)
find strong correlation between measures of banking development and
economic growth, Calamanti (1983) posits that the securities market
can positively contribute to growth if supported by appropriate
government policies. Richard (1996) observes that the growth of stock
markets increases the volume of longterm investments. Levine and
Zeros (1996) establish a positive relationship between measures of stock
market development and longrun growth rates. The stock markets are
seen to provide a means for risk diversification, acquisition of
information about firms, efficient allocation of funds and tying manager
compensation to stock performance. Internationally integrated capital
markets make diversification of risk possible, apart from the inflow of
financial resources. Levine (1997) reviewed a body of literature that has
bearing on the debate concerning the linkage between capital market
development and real sector growth. In that study, Levine discussed the
linkage between four different proxies of capital market development and
real sector growth. These capital market proxies include (a) liquid
liabilities (comprising currency plus demand deposits of banking and
nonbanking financial institutions), (b) bank credit as a ratio of total
credit by the banking sector and the central banking sector, (c) credit
allocated to the private sector as a ratio of total credit, and (d) credit
extension to the private sector divided by GDP. Levine postulates a
positive relationship between the above proxies of capital market
development and real sector growth as represented by per capita
income. In another study by Atje and Jovanovich (1996), the authors
focused their empirical work on the capital (equity) market development
and growth, using various proxies. These include (a) stock market
capitalisation (where market capitalisation refers to the value of listed
shares, (b) stock market turnover ratio (measured by the total value of
shares traded divided by market capitalisation).
Some of the measures include the promulgation of the
indigenisation decree, which made foreign promoted companies to divest
part of their shareholdings to Nigerian investors and consequently, listed
their shares on the Nigerian Stock Exchange (NSE) (Adegoke, 1998).
Others are the privatisation and commercialisation decrees of 1988
which culminated in the privatisation of many government owned
enterprises, the deregulation of capital market in 1992 and the repeal of
the Nigerian Enterprises Promotion Decree of 1989 (NEPD) and the
Exchange Control Act of 1962 and their replacement with the Nigerian
Investment Promotion Commission Decree and the Foreign Exchange
Monitoring and Miscellaneous Provision Decree both of 1995, a
development which internationalised the market. Since the deregulation
of the capital market in 1992; it has witnessed a lot of innovations and
competition while the market operations have equally grown. According
to Usman (1997); the market now has international image with the
repeal of the Nigerian Enterprises Promotion Decree of 1989 which
makes it possible for foreigners to own 100 percent Nigerian companies
including banks, the removal of restrictions on dividends and profits
repatriation by foreign investors. Others are the establishment of the
Nigerian International Debt Fund (NIDF), which pools together capital
from investors for investment in dollar denominated debt instruments in
Nigeria and the realisation of the Central Securities Clearing System
(CSCS) which has removed the delays in the processing of traded
securities. Apart from this, Usman remarked that the capital market
has created an opportunity for indigenous companies with the
introduction of the Second Tier Securities Market in 1985 and the
mobilisation of indigenous companies to the market. Thus, the
importance of the capital market as a catalyst of economic growth and
development is widely recognised by both economists and non
economists. The capital market plays strategic roles in the economic
development process. In particular, the roles of capital in the spheres of
financial intermediation, supply of needed fund, the activation of
entrepreneurial talent, productivity, economic growth and guidance of
the economy as a whole are particularly notable. The need for capital
market stems from the fact that it enables institutions in the economy
that are in need of medium to longterm funds for the acquisition of
fixed asset and other longterm projects to obtain such funds. In
addition, the capital market provides mechanism through which long
term loans and investments can be liquidated Usman (2000).
Apart from creating facilities for raising funds for investment in
longterm assets, Onukogu (1988) posited that the reasons for
promoting active capital market include:
It is essential to the above stated philosophy that the markets
contribute in the most effective way to the functioning and to the growth
of the economy and to the creation of wealth. Hence, the importance of
the capital market in a modern economy is shown as making possible a
separation of the function of savings and investments and facilitating
the continuous process of arrangements of saver’s assets portfolio.
These two activities tend to increase the volume of savings and
investments in an economy and to improve the allocation of resources
among alternative investments. The consequence of the foregoing is the
acceleration of the rate of development and industrialisation. This,
however, presupposes the efficient functioning of the capital market, an
important condition that is unfortunately yet to be satisfied in the
Nigerian context.
Theoretically, there is a strong controversy about the importance of
capital markets for economic growth and development. One line of
research, Goldsmith (1969) argues that as economies develop, self
financed capital investment first gave way to bankintermediated debt
finance and later to the emergence of equity markets as an additional
source of external funds. Thus, financial structure – the mix of
financial intermediaries and markets – changes as countries develop.
Alile (1996) posited that economic growth depends upon free open
market that encourages private sector initiatives. First, foreign capital
must be welcomed and not seeing as a lever of imperialism and
economic exploitation. Second, the development of international
distribution of shares through privatisation of state monopolies, which
usually generates competition and raises efficiency. This provides a fast
way of developing a liquid stock market. Third, the investment decision
also rests upon the ability to invest and repatriate capital and dividends
without constraint and without disadvantage such as taxation.
Countries with reasonable tax incentives have attracted huge influx of
foreign capital and vice versa. Fourth, credible analysis, research and
information flow that are timely, accurate and permit investors to make
the crucial decision to allocate asset to a country/market. This is a
combination of good fundamental research and information based on
internationally accepted standards as well as accounting systems that
encompass generally accepted principles and macroeconomic
indicators. Fifth, macroeconomic policy should promote a stable,
growth oriented economic environment. Its principal goals should be to
maintain a low sustainable rate of inflation and a stable currency so
that local market returns are not eroded by exchange rate depreciation.
Expanding on this linkage, Alile (1984) argues that since the central
function of the capital market is to assist in the mobilisation and
allocation of savings among competing uses, which are critical to the
determination of growth and efficiency of the economy, the behaviour of
the capital market necessarily promotes economic growth. For instance,
if “capital resources are not provided to those industries where demand
is growing and which are production and productivity inclined the rate
of expansion of the economy will inevitably suffer. Okigbo (1981)
emphasises that “the efficiency of the capital market is affected by the
extent to which the need for external finance by enterprises is met
through the market”. Others emphasise the promotion of economic
growth through risk diversification and international integration of stock
markets with the international economy. Saint – Paul (1992), Devereux
and Smith (1994) and Obstfed (1994) argue that through greater
diversification of capital markets influence growth by shifting investment
into higher return projects. Levine (1991), Bencivenga, Smith and Starr
(1996) focus on the liquidity creating ability of capital markets. They
indicate that capital markets may affect economic growth through the
creation of liquidity (ability to trade equity more easily) (Nyong 1997).
By facilitating longterm funds, liquid capital markets provide
permanent access to capital raised through equity issues, improve the
allocation of capital and enhance prospects for longterm economic
growth. This point has been emphasised by Hicks (1969). Hicks
submits that the industrial revolution was not the consequence of a set
of new technological innovations since the precondition for the
implementation of new technologies require the existence of liquid
capital markets. Thus, the industrial revolution had to wait for the
revolution in English financial market before it could occur. Studies by
Grossman and Stiglitz (1980), Kyle (1984) and Holmstrom and Tirole
(1993) introduce another dimension to the liquidity issue. These studies
show that liquid stock markets may lead to an improvement in corporate
governance through greater incentives for investors to acquire better
information about firms. Improved information may lead to efficient
allocation of resources and thus promote economic growth. (Nyong
1997). Greenwood and Smith (1996) were more concerned with
technological innovation. They indicate that capital markets may reduce
the cost of savings mobilisation and hence promote investment in the
most productive technologies. By making investment less risky and
more lucrative, capital market liquidity may also lead to more savings
and investment.
But the alleged positive linkage between capital market
development and economic growth is not proven. At best, it is
ambiguous. According to Deminrgue – Kunt and Levines (1996)
research, increased liquidity of the capital market can determine growth
through at least four channels. First, through the substitution and
income effect. By increasing the returns to investment, greater liquidity
of the capital market may reduce savings rates, and hence to a decline
in economic growth. Second, through uncertainty of saving. By
reducing uncertainty associated with investment, greater capital market
liquidity may lead to decline in saving rates arising from the ambiguity
of the effects of uncertainty on savings. It is argued that while certainty
makes an investment more attractive to risk – averse investors, it also
lowers demand for precautionary savings. Hence, the ultimate impact of
certainty generated by enhanced liquidity of the capital market is less
clear. Third, through investment myopia. Enhanced liquidity in the
capital market may be detrimental to corporate governance because as
more liquid markets make it easy for dissatisfied investors to sell
quickly, it weakens investors’ commitment and reduce their incentives to
exercise control “by overseeing and monitoring firm performance and
potential”. Thus, greater liquidity of the capital market may actually
impede economic growth. Fourth, through risk diversification and
capital integration. Better functioning, more internationally integrated
capital markets is said to stimulate economic growth by shifting society’s
savings into higher investment returns (i.e. improves resource
allocation), ceteris paribus (Saint Paul, 1992 Devereux and Smith 1994,
Obstfed, 1994). But, all things are not equal. Greater risk sharing lead
to decline, uncertainty may reduce the need for precautionary saving,
depress saving rates, impede economic growth, and reduce economic
welfare. Thus, “theory is ambiguous about the ultimate effects of
greater risk sharing through internationally integrated stock markets on
economic growth.
Indeed, even the oftentrumpeted benefit of capital market in
enhancing corporate governance has been questioned. Shleifer and
Vishny (1986) and Bhide (1993) argue that capital market development
which leads to more diffuse ownership may unfortunately impede
effective corporate governance. Shleifer and Summers (1988), Morck,
Shleifer and Vishny (1990) indicated that capital market development
may slow economic growth by easing counter productive corporate
takeovers. Perhaps, a far more serious challenge to the exponents of
positive linkage between capital market development and economic
growth is the argument that capital markets are mere “casinos” or “den
for speculators” that have little positive impact and potentially a large
negative impact, on economic growth (Levine and Zerves 1996). Mayer
(1988) argues that capital markets are unimportant for economic growth
because not much corporate investment is financed through the
issuance of equity. Thus, it is not all clear whether or not the
development of capital market promotes or inhibits longterm economic
growth.
2.11 CRITIQUES AND FOCUS OF THE PRESENT STUDY
The studies, especially those of India, Ghana, Tanzania, 41cross
countries and Nigeria have contributed to the understanding of the
problems and challenges facing third world countries in the
development of the capital markets. As can be seen from the various
studies, attention was focused on the hypothesis that capital market
developments have a positive relationship with economic growth. These
studies also identified the advantages and disadvantages of capital
market development and growth.
It is generally argued that in a few European /Asian countries and
even in Nigeria in recent past, the banking sector has led in providing
both shortterm and longterm credit to the private sector and
government for growth. In those countries, capital markets were not
considered critical for the development of the country. Other considers
capital markets as an avenue for speculators to make their money. Thus,
others argue that the capital market development strategy with regards
to economic growth is overblown. Some even went further to suggest
that the establishment of stock exchanges in developing countries will
not make much difference in mobilising and allocating credit to the
private sector for growth and poverty alleviation. The equity market in
Nigeria until the mid1980s generally suffered from the classical defects
of bankdominated economies, that is, shortage of equity market, lack of
liquidity, absence of foreign institutional, investors, and lack of investor’s
confidence in the capital market. To examine this relationship for the
Nigerian economy, there have been several studies in the recent past
(Aigbokan, 1996, Adeyemi 1998, Emenuga 1998). But there is still no
clearcut as to the role of capital market to economic growth in Nigeria.
This study provides the first attempt to test the above hypothesis, using
secondary and time series data of Real GDP and capital market
development indicators such as market capitalisation (X1), transaction
value (X2), turnover (X3) and number of listed companies (X4) in Nigeria
from 19712004. The direction of causality between capital market
development indicators and economic growth was also established using
Granger’s causality tests, which makes the analysis more determining
and resulting conclusions more specific (Granger, 1996). This study will
also investigate the direction of causality i.e. unidirectional or bi
directional between capital market development and economic growth.
This study is a bit similar to Nyong’s study (1998) as it made use of time
series analysis but different in that this study made use of First
Difference and Real Gross Domestic Product (19712004), while Nyong
(1998) used Principal Component Analysis and Growth and Real GDP
per capita (19701998). In this study all other critical factors in capital
market development such as institutional/regulatory factors, inflation
rate, financial market depth, socio political stability or otherwise,
dividend were held constant. And it is on this basis that effort is been
made to examine the role of capital market development to economic
growth in Nigeria (19712005).
2.12 PROBLEMS AND SOLUTIONS OF THE NIGERIAN CAPITAL
MARKET
The Nigerian capital market is an emerging market with growth
potentials. It is therefore, far from being a developed or even an efficient
market. It still operates within a constraining environment and has its
own peculiar shortcomings and inhibiting factors, the prominent of
which are as follows:
a) Low Public Awareness: Perhaps, the greatest impediment to the
development of the Nigerian capital market is poor public awareness of
its operations. Only a small percentage of Nigerians know what the
capital market is all about. These are the elite, only those with
economics, accounting or legal background can boast of a working
knowledge of the capital market. Majority of Nigerians know very little, if
anything at all, about the capital market.
b) Distortions in the Financial Markets: As a result of the shortterm
orientation of most Nigerians and indeed of the operators in the Nigerian
economy, there has been a sharp distortion in interest regimes.
Investment seems to attract higher yields in the money market than in
the capital market. In this circumstance, few rational investors will put
their money in longterm fixed interest securities or even in equities. The
distortions in the financial markets make it difficult for governments
and private organisations to successfully raise longterm funds in the
capital market. This may become almost impossible in a hyper
inflationary environment.
c) High Floatation Costs: Transaction costs associated with the issue
of securities in the Nigerian capital market are unnecessarily high. This
is brought about by the multiplicity of parties and fees payable in the
issue process especially an Initial Public Offering (IPO). For instance, the
issuing house often plays a triple role of an issuing house, a broker and
also an underwriter. For every issue, there has to be a prospectus, an
issuing house, a broker, an underwriter, a trustee for debt instruments,
a registrar, an auditor, a reporting accountant, a legal adviser and a
receiving bank. All these professionals charge fees for their services.
The SEC, which approves every issue, collect a fee for that while the
NSE charges fee for listing the security. There is also a fee for the
Central Securities Clearing System (CSCS). As a result of all these and
other charges, which an issuer is forced to pay, a substantial chunk of
the value of the issue is frittered away. The issuer may ultimately get no
more than 85% of the fund raised. Depending on the type of the issue,
the army of cost incurable also includes placing of advertisement in the
press on any proposed share issue; preparation of audited accounts and
profit forecast and holding of Annual or ExtraOrdinary General
Meetings. Thus, the financial costs of raising fund publicly through the
Stock Exchange are not only high but also sometimes tedious and have
reduced the rate at which Nigerian small/medium firms exploit the
market for fund.
d) Price Regulation: Price regulation by the Nigerian capital market
(SEC and NSE) presents supply and demand forces to determine the
price of shares of common stock. The price is manipulated by the
selected few, knowledgeable few and insiders which would ‘cheat’ the
small “maninthestreet” investor. As Onosode (1997) puts it, “In a
regime under which price movements are not merely monitored but are
regimented or managed to the extent that one believe they are on the
SEC there is hardly what one might call a market while the exchange
must not be allowed to degenerate into gambling casino, it must equally
not be managed as a savings bank”. He also asserts “one cannot
understand why a flourishing and wellmanaged company should have
its shares traded at below par or its normal value merely because it has
committed the crime of declaring a decent dividend out of revenue. The
NSE as far as trading practices are concerned is too insensitive and
obtuse for my liking. The element of speculation is virtually outlawed”.
More so, the NSE in fact reflects its own opinions on its price quotation.
The paradox of this argument which is widely accepted, is that stock
exchange prices do not necessarily are and not supposed to reflect the
value of a company’s assets or its profits but the value, (by whatever
criteria with which the stock exchange need not agree) which the
investors place on a company.
e) Absence of a vibrant stock market: According to Asemota (2002),
the absence of a vibrant stock market is responsible for the low level of
foreign direct investment in Nigeria. He attributed this to rigidities in
the capital market and the narrow structure of the nation’s financial
system and called for a broadening of the market situation for better
intermediation. The Nigerian capital market is small in relation to the
nation’s economy and the global economies in that the market
capitalisation in relation to the Gross Domestic Product (GDP) in
2001was 19.1% when compared to Chile 101.1%, South Africa 137.6%,
Malaysia 177.7%, United States 180.8%and Singapore 233.2%.
f) Paucity of shares: Paucity of shares to buy on the market and trade
in i.e. volume of securities as only about 15 to 20 percent of companies
shares are available for trading (Oronsaye 2004). A mere look on the
stock exchange daily reports reveals more positive (+) signs than
negative () signs, indicating that demand is by far more than supply.
The tendency is for existing investors to hold on to their securities for
the fear that if disposed of, comparatively, investment might not be
easily found for purchase. The desire for dividends, which principally
motivates investment in the securities market, discouraged trading in
the securities of companies with high dividend yield since holders of
such securities are usually reluctant to sell. Illiquid markets i.e. buy and
hold attitude of investors impairs activities in the Nigerian capital
market. This paucity of shares in the stock exchange was due to the
price fixing method adopted by the SEC. This resulted in low prices for
the shares being offered and, while being of benefit to Nigerian investors,
this had the effect of discouraging many companies from seeking public
subscription for their shares since higher prices could be and were
negotiated with prospective buyer under private treaty arrangement.
Added to this is the fact that most companies especially the indigenous
ones are still reluctant to raise funds via the stock exchange probably for
the fear of losing control, aversion of ownership dilution, cost of going
public and the burden of disclosing corporate information as Nigerian
businessmen prefer to keep their business within the family. A
consequence of these factors is that market floats (i.e. securities
available for regular trading) is relatively small.
f) Failure of certain stocks to perform: Out of 65 stocks, as at July 5
2002 only 4 is active while 61 stocks in the bond sector of Nigerian
Stock Exchange have remained in active over years as a result of
inability to turn out an impressive performance. In equity sector out of
200 securities listed 25 are dormant.
Other reasons for paucity of shares in the stock exchange market are
the:
* Sociopsychology of Indigenous companies and investors;
* Political nature of the capital market visàvis
i. Many industrial projects are established in partnership with
Nigerian governments or their development corporation;
ii. The desire on the part of the government to build a socialist
egalitarian economy in the past thus holding most of the
shares so that the few priviledged clique do not form
themselves into capitalist class to the detriment of the
masses; and
iii. Reluctance of foreign companies to quote their shares and
offer them to the public through the exchange due to fact that
they considered themselves capital wise viable not needing to
raise capital from the Nigerian capital market and also they
do not want to dilute their ownership and control with
Nigerians by such offerings and participation.
g) Lack of planning: The Nigerian capital markets do not envisage
future growth and development and that is why they are at the lowest
ebb. Thus, it should be noted that what is not planned for cannot be
controlled. Their planlessness is also reflected in the smallness of
stockbrokers and highly concentrated nature of their operation around
the big cities such as Lagos, Kano, Kaduna, PortHarcourt, Jos, Aba,
Onitsha, Enugu, Owerri, Benin, Uyo and Ibadan thus completely cutting
off massive investing public located all over Nigeria.
h) The Role of Government: The incessant government intervention in
price determination of shares of common stocks forbids the free
operation of the forces of demand and supply in the capital markets and
this impede the effective functioning of SEC in the bid of performing its
roles. It is sad to note that it is the same government which promoted
the establishment of SEC and NSE that do not seems to have full
confidence in the market due to its buyandhold strategy. Also,
government and its agencies participate in companies, yet do not
encourage such companies to seek quotation. More so, the price
taxation methods adopted by SEC tend to undervalue company stocks.
i) The Stock Exchange Requirements: The present Stock Exchange
listing requirements are said to be too harsh and stringent with the
result that the stock exchange is out of the reach of the smaller
companies. As Ebong (1981) asserted “that the requirements are
generally too demanding than what is required by company law. Such
high demand rules and regulations makes it difficult, if not damn right
impossible for some companies to have their dreams of raising funds
through the NSE.
j) Low Demand for Securities: The vicious cycle of poverty (i.e. low
personal income, low savings, low capital formation and low investment)
coupled with lack of proper knowledge about securities market,
availability of more attractive alternative investment particularly money
market instruments and real estates have hindered the demand for
securities and capital market development in general. One of the
greatest problems faced by the securities markets in Nigeria is how to
broaden the base of equity ownership.
k) Adetunji (1998) posited that the Nigerian capital market is still
underdeveloped. Studies show that less than 3 percent of Nigerian
invests in the stock market unlike 75 per cent in the United States, 63
per cent in the European Union and more than 26 per cent in South
Africa. This is in addition to the fact that foreign investors own 47 per
cent of companies quoted in the NSE. Apart form the cumbersomeness
of the manual system, which involves issuing, and/or reissuing new
share certificates to buyers and sellers, the transaction period of the
manual system could range from a minimum of two weeks to six
months. The implied advantage of the dematerialisation of share
certificates by the CSCS system is a shortening to T+3 days of the
overall transactiontrading period traditionally evidenced by share
certificates, given the elimination of the timeconsuming lodgement
process.
l) Cost of Transaction: the transaction cost associated with new issue
of shares and even and of existing ones in the Nigerian Stock Market
appear to be on the high side. This if not timely checked before the turn
of the century, will continue to militate against the development of the
market as prospective companies would shy away from getting listed or
quoted on the Stock Exchange.
m) Ughamadu (1996) also asserted that: (i) firms declare dividend but
hardly pay such to shareholders’ (Onwuka Hitek and Liz Olofin) (ii) bring
result to the market when it suits (iii) barring of 45 stockbroking firms
from NSE for non payment of statutory deposits including yearly fees
expected of them. SEC/NSE management are people fond of double
standard and that the two bodies are not transparent and they are going
to create a lot of problems for foreign investors (Asalu 2001). Stiff
competition and the instinct of survival sometimes encourage sharp
practices, which may undermine the capital market. It should be borne
in mind that if the market is undermined, investors and indeed, issuer
would lose confidence and cease to participate. It is therefore, very
important that the pressure of competition should not in any way
influence participants to engage in undesirable activities. Again, the
integrity of the capital market must always be preserved.
n) Apart from the struggle to combat paucity of tradable shares, the
Nigerian capital market’s regulatory agencies are contending with an
avalanche of sharp practices, dampening investor’s confidence in the
market. The market is replete with complaints such as: manipulation of
share prices by stock brokers; issuing house appropriating part or all of
the proceeds of issues to offset bridging loan; nonremittance of money
for purchase of securities by receiving agents or stock broking
companies; nonrelease of dividends or share certificates; trading in
unregistered securities; nondisclosure of material facts in offer
documents or scheme of arrangements in the case of mergers and
acquisitions and; company’s failure to open sinking fund account
towards redemption of debentures; unethical practices of fraud like that
of N318 million share scan involving Nestle and Unilever shares. Abuses
such as wide scale scams, fraud, dishonest insider dealings,
misrepresentation and nondisclosures occur regularly as operators
seek ways of capitalising on the lapses of the various regulatory bodies
e.g. multimillion naira Bonkolans scam; undue political interference in
the regulatory process has made the task of effective monitoring of the
capital market difficult thereby resulting in conflicting and weakened
regulatory institutions (OkerekeOnyuike, 2002).
o) Lack of Government Funding of SEC: Globally, government Fund
Securities and Exchange Commissions. Nigeria should not be an
exemption
Muhtar (2002) attributed the long absence from the bond market
to the absence of a vibrant secondary market to make such a bond
profitable. Such long absence of the government is in itself a problem
to capital market development in Nigeria. Other problems associated
with the Nigerian capital market include the following: infrastructural
deficiencies; poor packaging of issues; risk of defaulting in servicing
debt instruments; tax disincentives; failure to impose sanctions by the
authorities; fallacy of free market; macroeconomic problems (high
inflation, unstable interest rate etc.) and capital flight.
Political/Economic Instability: Perhaps, the greatest factor inimical to
the development of an economy and its capital market is instability in
the political /economic environment. An environment that is fraught
with instability portends a high risk to investors and would thus
discourage new investment while encouraging the exit of existing
investors.
These problems have led to the erosion of investor’s confidence in
the capital market resulting in avoidable delays in achieving the desired
level of growth and expansion of the market.
SOLUTIONS:
The following suggestions for enhancing the workings of the
Nigerian capital market and the activities of the operators therein:
(a) Public Enlightenment on the Capital Market: There should be a
massive nationwide campaign on the operations of the Nigerian capital
market. This should be done within the framework of workshops,
seminars, radio and television talkshows and the mounting of bill
boards all over the country. The SEC and NSE should jointly fund this
undertaking.
(b) Investment in Unquoted Equities: Investment in viable unquoted
shares should be permissible by the new pension legislation. This would
enable Pension Fund Administrators to take advantage of government
divestiture programmes. This would be necessary because many of the
privatisation exercises are conducted outside the stock exchange,
through strategic investors. Alternatively, it is recommended that
government divestiture programmes should be channelled through the
stock exchange in order to deepen and broaden the market.
(c) Abolishing of Tax on Dividends, Capital Gains and Interest Income:
In order to encourage short and longterm investments, taxes payable on
dividends, on capital gains and on interest receivable should be
abolished. Taxes should only be levied at the point of expenditure or
consumption and not on savings or investments.
(d) New Investment Outlets: The narrow scope of investment products
provides a disincentive for investing in the stock exchange. In order to
attract a wider audience of both local and foreign investors, product
innovation and development is crucial. Products such as options,
futures, mortgaged backed securities and other financial derivatives
help deepen the market.
(e) Listing Incentives: Introduction of various classes of stocks with
adjusted voting rights will enable individual and corporate owners who
fear loosing control of their companies to list their shares on the stock
exchange. In order to provide the incentives for companies to be listed on
the stock exchange, special tax rebates should be considered. This could
include offsetting the cost of IPOs and tax granting holidays for new
entrants into the market.
(f) Reduced Floatation Costs: Floatation costs of longterm
instruments should be minimal to encourage mediumsize indigenous
firms to access the capital market for longterm funds. Fees chargeable
by the regulatory authorities and the capital market operators should be
drastically reduced.
(g) Strict Enforcement of Capital Market Regulations and Sanctions:
There should be a strict enforcement of code of conduct for all operators
in the capital market and for the managers of all companies quoted on
the stock exchange. Stiff sanctions and penalties should be imposed on
all defaulters. The watchword for all should be good corporate
governance and transparency.
(h) Acceleration of the Privatisation Process: There is the need to fast
track the privatization process in the country at all levels of government.
This will complement the efforts of the regulatory agencies in promoting
the development of the capital market.
(i) Liberalisation of the Capital Market: The notion mooted long ago for
multiple stock exchanges for the country should be revisited in line with
the ongoing liberalisation of all sectors of the national economy. This will
include the muchneeded competition in stock market operations and
help bring the services of the exchanges to the doorsteps of all
Nigerians.
(j) Securities prices need to be determined freely by the forces of
demand and supply on the NSE
(k) The Employee Stock Ownership Plan is one of such devices in
Japan intended to encourage employees to acquire and hold shares of
the firm’s stocks by offering them special incentives. Nigeria should also
adopt such policy. A number of advantages can be derived from this
arrangement. First, the ownership of their own company’s shares may
strengthen their loyalty to the company. Second, the system contributes
to the welfare of employees and their asset formation. Third, as it
enables participating employees to purchase shares in small amounts, it
help increase the number of individual investors who for lack of funds
would not otherwise have invested in stocks. Finally, it is expected that
it will help to stabilize management since members are supposed to be
loyal to the organisation.
The growth of listed companies on the Nigerian Stock Exchange.
YEAR NO OF LISTE
D
REMARKS
19721979
12 Voluntary listings
19721979
66 Indigenization laws compelled foreign companies to sell their equity to Nigerians
19801988
15 Voluntary listing
19891993
67 Privatization of public enterprises
After2003
34 Central Bank compelled Bank’s to raise share capital (each time the bank come to the capital market.
After2003
Expected growth from federal government bonds, state, bonds, privatization. Pension reforms, CBN rules, possibly legislature amendments in tax laws, public corporation status and ventures capital industry growth.
Volatility
Volatility is a twelvemonth, rolling standard deviation estimate
based on market returns. Greater volatility is not necessarily a sign of
more or less stock market development. Indeed high volatility could be
an indicator of development, so far as revelation of information implies
volatility in a wellfunctioning market (Bekaert and Harvey 1995).
Asset Pricing
Asset pricing measures the degree of integration between national
stock markets and the world market and to ascertain whether markets
price risk efficiently. Although a market need not be integrated into the
world capital market to be developed; analysts generally refer to
countries that are more integrated and that price risk more efficiently as
more developed.
CHAPTER THREE
THE NIGERIAN CAPITAL MARKET AND RESEARCH METHODOLOGY3.1 THE NATURE AND STRUCTURE OF THE NIGERIAN CAPITAL
MARKET
The establishment of a formal stock market in Nigeria dates back to
the late 1950’s when there was an increasing need for government to
finance the growing deficits as from 1958 and mobilise savings to
finance development programme. In May 1958, the government set up a
committee under Professor Barback the then Director of the Nigerian
Institute of Social and Economic Research to consider modalities for
fostering a shares’ market in Nigeria. Consequently, the report of the
committee published in 1959 recommended that a market for shares
dealing be created. It also recommended the establishment of rules
regulating transfers, the reduction or elimination of stamp duties on
transfers and elimination of tax deduction at source as well as measures
to encourage savings and issue of securities of government and other
organisations. The acceptance of the Barback committee’s report led to
the registration and consequent incorporation of the Lagos stock
exchange in September 1960. It was given a legal backing by the Lagos
Stock Exchange Act of 1961. The Nigerian Stock Exchange (formally
called the Lagos Stock Exchange) commenced business on 5th July 1961
with an authorised share capital of 5000 made up of 500 shares of 10₤ ₤
each. In 1977, the Lagos Stock Exchange was redesigned as the Nigerian
Stock Exchange (NSE) with dealing branches in Lagos, Kaduna (1978)
Port Harcourt (1980), Kano (1989), Ibadan (1990), Onitsha (1990), Abuja
(1998) and Yola (2002). Lagos is the headquarters of the Stock
Exchange.
The capital market is a subset of the financial system that serves
as the engine of growth in modern economies. It is that part of the
financial system that is involved in providing longterm funds for
productive use. Capital market is that section of the financial system
that is responsible for efficiently channeling of funds from the surplus to
deficit economic units on a longterm basis. The capital market provides
another option for governments and companies to raise longterm funds
for the construction of bridges, schools and factories and purchase of
vehicles, facilities and equipment. Also called the securities market, the
capital market, has the following features:
a) The “Commodities” traded in the market are Medium and
Longterm Funds.
b) Financial assets traded are equity or common stock, preferred
stock, bond and debentures and government development
stock.
c) The market can be broadly divided into four categories
of:
i. Providers of funds (investors – individuals, unit trust and other
corporate investors);
ii. Users of funds (companies and governments at all tiers);
iii. Intermediaries’ (facilitatorsstockbroking firms, issuing
houses, registrars); and
iv. Regulators (Securities and Exchange Commission (SEC), The
Nigerian Stock Exchange (NSE) and Central Bank of Nigeria
(CBN)).
A capital market operator is one licensed by the Securities and
Exchange Commission to mobilise and channel funds into long term
investment. It also provides liquidity for those securities. The activities
of capital market operators include: (1) stock brokerage; (2) issuing
and marketing of primary securities; (3) underwriting of securities; (4)
share registration; (5) trusteeship; (6) unit trust schemes; (7) portfolio
management and other financial and advisory services.
There are three markets within the Nigerian Capital Market which
can be broadly classified into: (a) Primary Market: This is the market
where new securities are issued. The mode of offer for the securities
traded in this market includes offer for subscription, right issues, offer
for sales, private placement, listing by introduction and unit trust
scheme. (b) Secondary Market: This is the market for trading existing
securities. This consists of exchange and over the counter market where
securities are bought and sold after the issuance in the primary market.
The secondary market comprises the organised Stock Exchange and the
OverTheCounter (OTC) markets and it is a vehicle for providing
liquidity to investors. Licensed stockbrokers carry out secondary
market transactions. Securities traded include the federal government
development stocks, debenture stocks, preference shares, state and local
government bonds and equities (ordinary shares of quoted companies).
The transaction cycle, i.e. the time of buying shares and the time when
new certificates are cleared, used to take up to 6 months or 1 year. But
with the inception of Central Securities Clearing System (CSCS) the
cycle is now T + 3 days (i.e. delivery and settlement will be done within 3
working days after transactions). As a logical extension to the CSCS,
The Nigerian Stock Exchange has also replaced secondary market call
over trading system with an Automated Trading System (ATS). The
hardware and software for the ATS were installed on the redesigned
trading floor in Lagos. The Exchange officials, officials of the Securities
and Exchange Commission (SEC); Dealing clerks (stockbrokers) as well
as capital market reporters have been fully trained on the ATS
workstations and the system went live on April 27, 1999. The
introduction of the CSCS and the ATS has made the operations of the
Stock Exchange more efficient and transparent.
The Stock Exchange Market is further divided into: (i) Firsttier
market, and (ii) Secondtier market. The firsttier market is highly
dominated by very big companies and conglomerates, the secondtier
market that was introduced in April 1985 serve the interest of small but
largely indigenous companies.
(c) The Derivatives Market: The derivatives market in Nigeria is its
infancy. It is the market that trades, not in the issued securities, but on
the right to title on the underlying security or on the basis of the future
title to the security. The only derivative presently being actively traded
on The Nigerian Stock Exchange are Rights offer, Futures, Options and
Global Depository Receipts (GDRs) and Swaps have not been introduced
into the Nigerian capital market yet. Global Depository Receipts (GDRs)
and American Depository Receipts (ADRs) are instruments through
which local companies can raise fund from international fund markets.
Financial instruments are those instruments used in mobilising
and allocating long term funds for investment purposes. Which can be
classified as: (a) Equities (b) Debt (government bond of federal, state and
local government) which is redeemable after certain fixed period of time.
(c) Industrial loans or debentures stocks and bonds. According to Olowe
(1998), the instruments traded on the NSE can be classified as follows:
i) Fixed Returns Securities: Federal Government Development
Loan Stock and State Revenue Bonds, Commercial and Industrial Loan
or Debenture Stocks; Preference shares;
ii) Variable Return Security: Equities (Ordinary shares or common
stock), Preference shares, Industrial Loan Stocks (Debentures –
redeemable or irredeemable), Gilts – mainly Federal Government of
Nigeria Development Stocks and State Government Bonds, Debt
Conversion, Mergers/Acquisitions, Export Notes, Collaterised Mortgage
Securities.
The Nigerian capital market institutions consists of all the organs
involved in the facilitation or transfer of medium and long term funds for
investment purpose. These include the Federal Ministry of Finance,
Central Bank of Nigeria, Securities and Exchange Commission; Nigerian
Stock Exchange (NSE), Nigerian Enterprises Promotion Board, Merchant
and Commercial Banks, Issuing Houses, Stockbrokers, Share
Registrars, Leasing Companies, Unit Trusts, Public Debt Office,
Development Finance Institutions, Investors, Insurance Companies and
Pension Provident Funds. While the NSE supervises the operations of
the formal quoted market, the SEC and the Nigerian Enterprises
Promotion Board takes charge of the overall regulations of the entire
capital market. Both the Federal Ministry of Finance and the Central
Bank of Nigeria provide further regulations in terms of guidelines set in
monetary policies and special directives.
FIGURE 3.1: THE CENTRAL PLACE OF THE NIGERIAN STOCK
EXCHANGE
Nigerian Enterprises Promotion Board
Securities Registrar
Nigerian Stock Exchange
Professional Group (Solicitor/Accountant Value)
Issuing HousesStockbrokers
CBN
SEC
Underwriters
Fund Users
Source: Alile, H. I. and Anao, A. R. (1986) The Nigerian Stock
Exchange Market in Operation. Jeromelaito and Associate Limited,
Nigeria.
The Capital Market in Nigeria
A Snap Shot of Inter Relating Institutions and Stakeholders
Source: Dr. (Mrs) Ndi OkerekeOnyiuke (2004) The Capital Market and
National Development (The Global Trend). A Paper Presented at the
The NigerianStock Exchange
The Investor (Nigerians)
The Broker/Dealer
The National Assembly
(Capital Market Committee)THE NIGERIA STOCK EXCHANGE
265 Securities 200 Companies State Govt. BondsFed. Govt. Bonds (150 billion to be listed)
Registrar
Clearing &Settlement
IPOCentral SecuritiesClearing System
Central & ExchangeCommission
The Company(The Issuer
The IssuingHouse (InvestmentBank)The NigerianStock Exchange
Nigerian Stock Exchange Biennial Conference for Capital Market
Operators. 30th June – 2nd July.
FIGURE 3.2: INSTRUMENTS; OPERATORS AND REGULATORS OF
THE NIGERIAN CAPITAL MARKET.
Securities and Exchange Commission (Apex Regulatory Authority).
The Nigerian Stock Exchange (Self Regulatory Organisation)
REGULATORS
Source: Oba Ekiran. (1997) The Functions of Securities and Exchange Commission (SEC) in the Nigeria n Capital Market. A Paper presented at the Nigerian Stock Exchange in
House Lectures September 6. p.3
INSTRUMENTS
OPERATORS
Brokers/Dealers
Issuing Houses
Investment Advisers
Portfolio Fund Managers
Trustees
Registrars
Derivatives(Rights, Options, Futures)
Funds (Mutual Funds Unit Trust Investment
Debt (Stocks, Bonds, Debentures)
Ordinary Shares (Equity)
Preference Shares
The Nigerian Stock Exchange (NSE) is the center point of the
capital market, while the Securities and Exchange Commission (SEC) is
the major regulatory body for the entire market which covers activities
on and off the Stock Exchange. SEC evolved from the capital issues
committee, which was set up as a department in 1962 by the Central
Bank of Nigeria to regulate capital issues in the country. Encouraged by
the performance of the committee, the government provided legal
banking through the Capital Issues Commission (CIC) Decree no 14 of
1973. The CIC was later superseded by the SEC which was set up by
the SEC Decree No 71 of 1979 reenacted by the SEC Decree.
The five main functions/objectives of SEC as per the decree could be
summarized as follows:
i) Allocation: To clear allotment of securities in a public offering
to ensure wider spread of share ownership.
ii) Surveillance: To monitor the activities on the Nigerian Stock
Exchange trading floors in order to ensure orderly, fair and
equitable dealings in securities and to forestall illegal deals by
privileged insiders at the expense of innocent and often ignorant
investors.
iii) Registration: It is empowered to register:
a. All securities proposed to be offered for sale or
subscription by the public or offered privately.
b. Stock Exchange and its branches.
c. Persons/Institutions involved in securities dealings –
stockbrokers; registrars; securities dealers and their
agents; Issuing houses; Fund Managers etc.
d. Securities to be traded or being traded (shares,
debentures etc); this is to ensure high standard of
professionalism and integrity in the securities market.
iv) Mergers and Acquisitions: It is empowered to approve and
review mergers, acquisitions and all forms of business
combinations.
v) Capital Market Development: To create the necessary
atmosphere for orderly growth and development of the capital
market through:
a. Public enlightenment programme, seminars, workshops,
symposia and publications.
Stimulating ideas, initiating policy changes and innovations for the
growth of the securities market.
NSE expanded sources of financing for small domestic
entrepreneurs (SMEs) through the introduction of Second Tiers
Securities Market (SSM) with considerable concessions for listing. An
association of Indigenous Quoted Group (IQG) was established to
monitor and reinforce the efforts of NSE and to liaise with SEC. Capita
market should play a significant role in financing development projects
in transport, telecommunication, technology, etc and other development
projects with huge capital requirements. The capital market provides a
better and more efficient financing option for the development of
infrastructure than the customary but inefficient money market options.
The Nigerian Capital Market is guided by specific laws and
legislations. They include the following:
(a) Lagos Stock Exchange Act 1961: This is a legal backing to the
stock exchange in Nigeria. The salient point of this act is that
only licensed stockbrokers and issuing houses (i.e. dealing
members of the exchange) are allowed to buy and sell shares on
behalf of Nigeria and foreign investors.
(b) Securities and Exchange Decree 1979 and 1988 (as amended):
This is a government agency that conduct surveillance in
securities dealing promotes market development and protection
of investors.
(c) Privatisation and Commercialisation Decree No 25 of 1988: The
above decree of the federal government of Nigeria is a key
element of Nigeria structural adjustment to reoriented the
government enterprises for privatization and commercialisation
towards a new horizon of performance improvement, violability
and overall efficiency.
(d) Companies and Allied Matters Decree (CAMD) 1990.
(e) Foreign Exchange Miscellaneous Provision Decree 1995.
(f) Nigerian Investment Promotion Commission Decree 1996
(g) Investment and Securities Act (ISA) 1999 prohibits insider
dealing and all manipulations and abusive practices in the
Nigerian capital market in order to promote transparency and
fairness in securities trading.
3.2 RESEARCH HYPOTHESES
For the realisation of research objectives this hypothesis is
formulated:
1) There is no strong relationship between market capitalisation and
long run economic growth.
2) There is no strong relationship between value of transaction in
capital market and long run economic growth.
3) There is no strong relationship between volume of transaction in
capital market and long run economic growth.
4) There is no strong relationship between number of securities in
capital market and long run economic growth.
3.3 DATA SPECIFICATION
The Data used for this study to observe Nigeria’s economic growth
is the Real Gross Domestic Product(GDP) Y) (19712005), and capital
market development indicators (market capitalisation, transaction value
(value of shares traded), turnover (volume of shares traded) number of
securities (19712005), and NSE AllShare Index (19842005). All
variables are expessed in their logrithm form. The estimation were
carried out using Eview 3.0 Econometric software package. Transaction
value and volume of transactions include all instruments of the capital
market such as government securities, industrial/equity securities.
3.4 METHOD OF DATA COLLECTION
Data for this study were obtained from secondary sources on the
Nigerian economy and Nigerian capital market covering 19712005. The
data set are obtained from various issues of the Central Bank of Nigeria
Statistical Bulletin and Annual Report and Statement of Accounts (1971
2005). Capital Market Development indicatorsmarket capitalisation
(19712005), transaction value, volume of transaction, number of
securities (19712005), turnover (19712005), and Allshare index (1984
2004) were obtained from the various issues of Nigerian Stock Exchange
Annual Report and Statement of Accounts, Nigerian Stock Exchange
Fact Book, Securities and Exchange Commission Annual Reports and
Statement of Accounts, SEC Journal and SEC Capital Market
Development of various years.
3.6 METHOD OF DATA ANALYSIS
Time series analysis was used in examining the data obtained for
this study from 19712005. All the variables were stationary at first
differencing; this therefore implies the use of first difference in our
model.
3.6.1 MODEL FORMULATION
The linkage between capital market and economic growth has
occupied a central position in the development literature (Akinfesi, 1987;
Samuel 1996; DemirgueKunt and Levine 1996; Levine and Zervos,
1996; Obadan 1998; Onosode 1998; Emenuga 1998; Osinubi 1998;
Adebiyi 2002). In examining this on Nigeria’s data, the study use the
neoclassical growth model otherwise called the growth accounting
framework, to explain the source of growth in an economy. The national
accounts and aggregate production function form the basis of the
economies to be analysed. This approach has got a wide application in
econometric analysis (Obstfeld 1994, Akinlo and Odusola 2000). Using
a production function approach, it states that the growth rate of output
(GDP) is principally determined by the following factors:
the rate of growth of gross labour and or the rate of growth of its quality
multiplied by the labour income share; (L); the rate of growth of gross
capital input and/or the rate of growth of its quality; multiplied by the
capital income share (K); and change in technology or total factor
productivity (TFP) (T).
This is given as Y = f(L, K, T).
Where Y = Real GDP
L = Labour
K = Capital
T = Technology
The application of this method however has been extended to
incorporate other determinants of economic activities such as financial
sector development (proxy by capital market development indicators),
trade (openness), debt, state of political stability, public and private
policy (public investment, private investment). (DemirgueKunt and
Levine 1996, Menu 1998, and Osinubi 1998).
The model takes a lead from the works of previous authors such
as: Nyong (1996), Osinubi (2000), Adebiyi (2003), Nwokoma (2004).
In line with the above specification; our model is specified thus:
GDP = f (CMI)
Where GDP = Real GDP
CMI = Capital market indicators proxy by market capitalisation
(MKK) transaction value (VAT), volume of transaction
(VOS), and number of securities (NOS)
The estimate form of the model is as given:GDP = f(α0 + β1MKK + Β2VAT + β3VOS + β4NOS + Ul)
………………………(1)
Where GDP = Real GDP
α0 , β1, β2, β3, β4, are the parameters estimates and U is the error
term
The link between capital market development and economic growth
is derived from the services the capital market provides to the economy
as a whole. Real gross domestic product (GDP) is the dependent
variable while capital market development indicators such as market
capitalisation, (MKK) transaction value (VAT). Volume of transaction
(VOS) and number of securities (NOS) are the independent variables.
Aprori
Since the larger the size of the Market capitalisation (MKK), the
better the market and the more we expect the economy to grow. Thus we
expect a positive relationship between market capitalisation (MKK) and
economic growth as measured by Real growth domestic product (GDP).
Conversely if the relationship is negative, it means that the market is
bearish.
In case of value of transaction (VAT), a positive relationship is
expected with economic growth since a rapid increase in the trading
volume of securities of the Nigerian stock exchange is indicative of
interest in the capital market.
Volume of transaction can be positive or negative depending on the
economic situation over time. A favourable economic situation prompts
in increase volume of transaction while an unfavourable economic
situation will prompt a decrease volume of transaction.
Number of securities can be positive or negative depending on the
country’s economic situation. In countries with high aversion to
companies going public, the number of listings is usually small while in
countries where public quotation is seen as a prestige and its benefits is
well realised, the number of equity listing is relatively high.
The first difference method was employed as a means to reduce
multicollinearity in our relationship. In estimating the relationship
between economic growth (GDP) as a function of capital market
development indicators [market capitalisation (MKK) transaction value
(VAT) volume of transaction (VOS) and number of securities (NOS)] over
a 35years period. It is obvious that both economic growth and capital
market development indicators move in the same direction overtime.
One way to reduce the severity of multicollinearity is to proceed as
follows:
GDPt= βo + β1 MKKt+ β2 VATt+ β3 VOSt + β4 NOSt + Ut
…………………………(1)
This is rewritten in form of equation 1.
If this relation holds at time t, it is also possible to hold at time (t
l). Therefore, if we lag equation (1) by one period, we have;
GDP t1 = βo + β1 MKK1 + β2 VATT1 + β3 VOST–1 + β4 NOST 1 + Ut + Ut
1………(2)
Subtracting equation (1) from (2), we have:
GDP t GDP t1 = βo + β1(MKKtMKKt1) + β2(VATT –VATT1) + β3 (VOST
– VOST1) + β4(NOST + NOST1) + Ut – Ut –
1………………………………………………………(3)
Equation (3) is known as the first difference equation and is based
on the estimation of differences of successive values of the variables
rather than the original values.
3.6.2 Unit Root Test
This session explained the process of stationarity of variables using
Augumented DickeyFuller (ADF) Test and Philips Peron (PP) Test.
3.6.2.1 The Augumented DickeyFuller (ADF) Test
To illustrate the use of DickeyFuller tests, consider first
Autoregressive Process (AR) process:
yt = + y t1 + fti
where and are parameters and f t is assumed to be white noise. Y is
a stationary series if 1< <1. If =1, y is a nonstationary series (a
random walk with drift); if the process is started at some point, the
variance of y increase steadily with time and goes to infinity. If the
absolute value of is greater than one, the series is explosive.
Therefore, the hypothesis of a stationary series can be evaluated by
testing whether the absolute value of is strictly less than one. Both
the DF and the PP tests take the unit root as the null hypothesis H0:
=1. Since explosive series do not make much economic sense, this null
hypothesis is tested against the onesided alternative H1: <1.
The test is carried out by estimating an equation with yt1
subtracted from both sides of the equation;
y t = + y t1 + fti
Where = 1 and the null and alternative hypothesis are
H0: = 0 1 H1: <0
While it may appear that the test can be carried out by performing a ttest on the estimated , the tstatistical under the null hypothesis of a unit root does not have the conventional tdistribution. Dickey and Fuller (1979) showed that the distribution under the null hypothesis is nonstandard, and simulated the critical values for selected sample sizes. More recently, MacKinnon (1991) has implemented a much larger set of simulations than those tabulated by Dickey and Fuller. In addition, MacKinnon estimates the response surface using the simulation results, permitting the calculation of DickeyFuller critical values for any sample size and for any number of righthand variables. Eviews reports these MacKinnon critical values for unit root tests.
The simple unit root test described above is valid only if the series is an AR process. If the series is correlated at higher order lags, the assumption of white noise disturbances is violated. The ADF and PP tests use different methods to control for higherorder serial correlation in the series. The ADF test makes a parametric correction for higherorder correlation by assuming that the y series follows an AR( ) process and adjusting the test methodology. The PP approach is described below.The ADF approach controls for higherorder correlation by adding lagged difference terms of the dependent variables y to the righthand side of the regression.
y t = + y t1 + 1 y t1 + 2 y t2 + ……. 1 y t +1 + ft
This augmented specification is then used to test:
H0: = 0, H1
3.6.4 Granger Causality Test
We also used Granger causality regressions. As suggested by
Granger (1969, 1980), the test was used to examine the relationship
between economic growth (Real Gross Domestic Product) and capital
market development indicators [market capitalisation (MKK), transaction
value (VAT), turnover ratio (VOS) = (MKK/ Y) and number of company
listed on the Nigerian Stock Exchange (X4)]. A comprehensive test of
causality between the two variables economic growth and capital market
development indicators should allow for an additional channel through
which causality could emerge. The Granger causality test examines
whether past changes in one stationary variable Xt help product current
changes in another stationary variable Yt, beyond the explanation
provided by past changes in Yt itself. If not, then Xt does not Granger
cause Yt.
To establish the direction of causality between capital market
development and economic growth we use Granger’s causality tests
(Granger, 1969).
The model is given by:
Y = wo + w1Y1 + XΨ 1t1 + XΨ 1t2 + v3 ………………………………(4)
X1 = yo + yX1t1 + ØiY1t1 + Ø2Y1t2 + e4 ……………………….……(5)
Xt = wo + w1Y1t1 + XΨ 2t1 + XΨ 2t2 + v3………………………….....(6)
X2 = yo + yX2t1 + Ø1Y1t1 + Ø2 Y1t2 + e4 …………………………...(7)
X1t = wo + w1Y1t1 + wX3t1 + XΨ 3t2 + v3 …………………………..(8)
X3 = yo + y1t3t1 + Ø1Y1t1 + Ø2Y1t2 + e4 ………………………..….(9)
Y1t = wo + w1Y1t1 + XΨ 4t1 + XΨ 4 + 2 + v3 ………………….……(10)
X4 = yo + y1X4t1 + ØY1t1 + Ø2Y1t2 + e4 …………………….……(11)
These equations are tested using Fratio. Chow test are used to
establish the stability of the regression result.
CHAPTER FOUR
DATA PRESENTATION AND ANALYSIS
4.1 INTRODUCTION
As a preamble to results of the study on capital market
development and economic growth in Nigeria, a summary of the
descriptive statistics is considered worthwhile. The variable used as a
measure of economic growth is real gross domestic product (RGDP),
while the four surrogate variables used as measures of capital market
development are market capitalisation, transaction values, turnover and
listing. Time series was used in examining the data obtained for the
study from 19712004, while simple percentages was used only for
indicators whose data were in existence from 19611970. First difference
method was used to reduce the multicollinearity in the relationship
between economic growths as a function of capital market development
indicators. We also used Granger causative regressions to establish the
direction of causality between capital market development and economic
growth, while chow test are used to establish the stability of the
regression result.
4.2 CAPITAL MOBILISATIONS
TABLE 4.1: REAL GDP. (19712004)
Year Real GDP =N=
% Growt
Year
Real GDP
% Growth
Million h =N= Million
1971 65707.0 21.0 1988 77752.5 9.9
1972 69310.6 5.0 1989 83495.2 7.4
1973 73763.1 6.0 1990 90342.1 8.3
1974 82424.8 11.7 1991 94614.1 4.8
1975 79988.5 3.0 1992 97431.1 3.0
1976 88854.3 11.1 1993 100015.2
2.3
1977 96098.5 8.2 1994 101330.0
1.3
1978 89020.9 7.4 1995 103510.0
2.4
1979 91190.7 2.4 1996 107020.0
3.4
1980 96186.6 5.6 1997 110400.0
3.2
1981 70395.9 26.8 1998 112950.0
2.4
1982 90157.0 03 1999 116400.00
2.8
1983 66389.5 5.4 2000 120590.0
3.8
1984 63016.4 5.1 2001 125720.0
3.9
1985 68926.3 9.4 2002 129830.0
3.5
1986 71075.9 3.1 2003 146070.0
10.2
1987 70741.4 0.5 2004 151912.8
10.4
Source: 1) Central Bank of Nigeria Statistical Bulletin Vol. 11 No 2 Dec.
2000.
2) SEC Publications of 19712004
3) NSE Publications of 19712004.
From the empirical literature, real gross domestic product is used as an
indicator of economic growth. Table 4.1 reveals that real gross domestic
product and the rate of growth. In 1971, the real gross domestic product
stood at =N=65.700billion as against =N=1.52trillion or 131.2%.
TABLE 4.2 SUMMARY OF REAL GROSS DOMESTIC PRODUCT
Year 196069
197074
197579
198084
198589
199094
199599
20002004
Annual Average Total GDP
26.8 58.2 73.768.6
68.6 74.8 96.95
110.05
134.8
Average Growth Rate
3.8 8.8 2.3 1.44 4.4 3.6 2.8 6.3
Source: Derived from Federal Office of Statistics Annual Report and Statement of Accounts (Various Issues).
The average total GDP in 197074 was 58.2, with an average growth
rate of 8.8%, rose to 73.7 in 197579 with an average growth rate of
2.3%, dropped to 68.6 with growth rate dropping to negative –1.44 %,
rose again to 74.8 in 198589 with an average growth rate of 4.4 %,
increased to 96.95 in 199094 with growth rate 3.6%, rose to 110.05 in
199599 with average growth rate of 208% while in 20002004, the
average total GDP was 134.8 with an average growth rate of 6.36%. An
overview of current macroeconomic indicators revealed that Nigeria has
no reason to be poor, and the clearly observable misery is largely self
inflicted. The challenge is to accept the need to unscramble existing
economic policies, reexamine we and map out strategies that can help
Nigeria rediscover her place in the committee of nations. In Nigeria’s
search for growth, it would be necessary to apply the principle that
“people respond to incentives other than relevance on false panaceas of
filling the financing gap; reliance on human and physical capital
accumulation alone., and structural adjustment without adjustment.
Empirical evidence on growth and bears out the prediction that if
incentives for private and public sector to invest in the future are good,
the growth will happen; if incentives are poor, growth will not happen.
Growing the economy is a serious business that requires a well
articulated and documented plan that must address: the vision and
mission for the country; growth objectives; strategies to achieve set
objectives; specific action steps and milestone and monitoring
mechanism to ensure effective implementation of identified deliverables.
For the private and public sectors to operate at optimal level, they need
longterm funds; such long term funds can only be obtained from the
capital market. And when private and public sectors operates optimally,
the aggregate performance of the private and public sectors impacts
positively on the economy.
TABLE 4.3 NEW ISSUE (19712004)
Year New Issues (=N=m)
% Growth Year New Issues (=N=m)
% Growth
1971 87.0 8.1 1988 399.9 11.3
1972 70.6 11.9 1989 1629.7 307.5
1973 134.3 90.2 1990 1342.5 17.6
1974 76.7 42.9 1991 1869.9 39.3
1975 451.5 488.6 1992 4120.4 120.3
1976 441.3 2.2 1993 3984.6 3.3
1977 478.7 8.5 1994 2672.2 32.9
1978 220.0 54.0 1995 7083.6 165.1
1979 238.0 8.2 1996 21453.2 202.8
1980 378.8 59.1 1997 10958.3 48.9
1981 455.2 20.2 1998 17274.4 57.6
1982 533.4 17.2 1999 12038.0 30.3
1983 448.4 15.9 2000 35500.0 194.9
1984 159.7 64.4 2001 45600.0 28.4
1985 817.2 411.7 2002 67660.0 48.3
1986 835.0 2.2 2003 185020 173.4
1987 450.7 54.0 2004 235530 27.3
Source: Central Bank of Nigeria Statistical Bulletin Vol. 11 No. 2, 2000
2003
SEC Publications 19712003. NSE Publications 19712004.
Table 4.3 reveals that there is considerable growth in new issues
from =N=87.0million in 1971 to =N=235,530 million in 2004, this is a
2706.24% increase. The value of new issues fluctuated between 1971
and 1999, moving from only =N=87million to =N=378.7million in 1980,
=N=159.7 million in 1984 to =N=1629.7 million in 1989 to
=N=1342.5million in 1990, to =N=21453.2million to =N=12038.0million
in 1999. Although steady increases continued to be experienced in the
Nigerian stock market from =N=35500millioin in 2000 to
=N=235,530million in 2004. A number of factors have been
instrumental to the increase in new issues; particularly among them is
the high cost of borrowing in the money market
TABLE 4.4 NEW ISSUES RATIO 19712004
Year 197175
197680
198185
198690
199195
19962000
20012004
New Issues/ GDP
1.1 0.9 0.9 1.6 0.5 0.6 1.5
Source: Central Bank of Nigeria Statistical Bulletin Vol. 11 No. 2, 2000
2003
SEC Publications 19712003. NSE Publications 19712004
The summary of ratios of Table 4.3 is Table 4.4. The new issues
/GDP ratio is generally low for all the periods ranging from 1.1% (1971
75), 0.9 (197680), (198185) respectively, 1.6 (198690), 0.5 (199195),
0.6 (19962000) and 1.5 in 20012004.
Table 4.4 show a remarkable consistency for the performance of
new issues ratio in an emerging stock market where the volume of new
stock market issues is considerably understandable. Our preoccupation
in this section is not so much with the generally low contribution of new
issues to the macroeconomic aggregates but rather, the marked
improvement during the period of reforms, that is, between 19862004.
The exchange continues to meet the financing needs of businesses in
Nigeria. This important function of the market was once again brought
to the fore with the Central Bank’s directive to banks on minimum
shareholders’ fund. The directive has compelled many banks to
approach the stock market for additional funding in 2004. The exchange
considered and approved 37 applications for new issues valued at
=N=235.53billion, as against 26 applications for new issues valued at
=N=185.0billion in 2003. This confirms the high level of investors’
confidence in the Nigerian capital market. Significantly, the private
sector accounted for the bulk of the new issues approved in 2004,
unlike in 2003 when the Federal Government bond issue accounted for
=N=150billion out of the total amount approved to be raised during the
year.
TABLE 4.5 MARKET CAPITALISATION
Year =N= Million
% Growth
Year =N= Million
% Growth
1971 40.7 1988 10020.7 20.7
1972 169.3 15.1 1989 12848.8 28.2
1973 194.8 39.9 1990 16348.4 27.2
1974 272.6 40.5 1991 23,124.9 41.4
1975 313.9 15.3 1992 32500 40.5
1976 458.3 46.4 1993 46900 44.3
1977 618.5 34.9 1994 65500 39.7
1978 1071.5 73.2 1995 171100 161.2
1979 2631.6 238.9 1996 285600 66.9
1980 4464.2 69.6 1997 292000 2.2
1981 4970.8 11.3 1998 263300 9.8
1982 4025.7 19.0 1999 299900 13.9
1983 5268.0 30.8 2000 472900 57.7
1984 5514.9 4.7 2001 662600 40.1
1985 6670.7 20.9 2002 763,900 15.3
1986 6794.8 1.8 2003 1359000 77.9
1987 8297.6 22.1 2004 2112000 55.5
Source:1) Central Bank of Nigeria 20.7Statistical Bulletin Vol. 11 No 2
Dec. 2000.
2) SEC Publications of 19712004
3) NSE Publications of 19712004.
Table 4.5 reveals the total market capitalisation for the period
19712004. Table 4.5 shows that there is a remarkable performance
from =N=40.7million in 1971 to =N=2.11trillion, a growth of 5189.9%, the
year 1979 and 1995 recorded the highest growth of 238.9% and 161.2%
respectively, while only two years, 1982 and 1998 recorded a negative
growth of 19.0 and 9.8% respectively due to price losses in equity sector
which resulted to decline corporate earnings and listing. A combination
of new listings, supplementary issues and price appreciation in the
equities sector often account for growth in market capitalisation while
delisting of some mature stocks and price losses in the equities due to
declining corporate earnings which are responsible for the fall of market
capitalisation. The market capitalisation as an indicator of the depth of
the market shows that in 1980 and 1987, the market grew 1.94times,
19881997, the market grew29.14 times and 19982004 the market grew
by 8.02 times. However, in view of the fact that average Nigerian investor
purchases shares for keeps and not for speculative purpose, the market
capitalisation is not a true reflection of market depth. What is clear
though is that while the operators of the securities market remains
pitifully limited when compared with those of Europe, the United States
and Japan, the number and activity of individual traders have increased
as a result of larger floatation of company shares. Moreover, the volume
and value of floatation in the Exchange is increasing.
TABLE 4.6 VALUE OF TRANSACTION 19612004 (Nm)
Year Government
Securities
% Industrial Securities
% Total
%
1961 1.4 94 0.09 6.0 1.49 1962 4.2 92.7 0.33 7.3 4.52 203
.31963 9.7 93.8 0.64 6.2 10.34 128.
71964 11.8 84.3 2.2 15.7 14.0 35.
41965 14.4 90.6 1.5 9.4 15.9 13.61966 15.2 92.7 1.2 7.3 16.4 3.11967 12.2 97.6 0.3 2.4 12.4
24.4
1968 12.6 98.4 021 1.6 12.81 3.31969 16.6 98.9 018 1.1 16.38 27.91970 16.4 98.6 024 1.4 16.64 1.61971 16.3 90.1 1.8 9.9 18.1 8.8
1972 26.2 96.4 098 3.6 27.18 15.21973 91.9 99.4 053 0.6 92.43 25.
91974 49.4 97.4 1.3 2.6 50.7
45.11975 62.8 98.6 0.9 1.4 63.7 25.
61976 111.3 99.5 0.6 0.5 111.9 75.61977 178.8 99.3
31.2 0.67 180.0 60.
81978 187.2 98.7
02.5 1.3 189.7 5.4
1979 257.5 98.15
4.4 1.7 261.9 38.1
1980 503.4 98.00
8.6 1.7 512.0 95.5
1981 321.0 98.00
6.1 1.8 332 35.1
1982 207.0 96.3 8.0 3.7 215.0 29.4
1983 384.8 96.7 13.1 3.3 397.9 85.11984 240.9 94.0 15.6 6.0 256.5
35.5
1985 296.0 92.7 23.6 7.3 319.6 24.2
1986 477.6 96.00
20.3 4.0 497.9 56.3
1987 340.0 89.0 42.4 11 382.4 23.2
1988 99.4 75.3 32.6 24.7 132.0 65.5
1989 582.4 95.4 27.9 4.6 610.3 362.3
1990 124.3 55.1 101.1 44.9 225.4
63.11991 92.7 38.3 149.4 61.7 242.1 7.41992 85 17.3 406.7 82.7 491.7 103.
11993 84.7 10.6 719.7 89.4 804.9 63.
71994 15.2 1.5 970.7 98.5 985.9 22.
51995 00 00 1838.8 00 1838.8 86.
51996 12 0.17 6972.7 98.8
36999.6
280.6
1997 72.6 0.7 10257.9 99.3 10330.5
47.6
1998 15.6 0.11 13555.5 99.89
13571.1
31.3
1999 0.8 0.01 14081.5 99.99
14082.3
3.8
2000 8.1 0.03 28145.0 99.97
28153.1
99.9
2001 35.6 0.06 57648.2 99.94
57,683.8
104.9
2002 5000 0.80 593000 92.2 60320 4.52003 .281 0.00
2120.422 99.9
9120703
100.0
2004 20323.38 0.9 223787.62
99.1 225820
187.1
Source: The Nigerian Stock Exchange and CBN Annual Report and Statement of Accounts 19612004. The NSE: The Stock Market in 2004
The value of transaction as shown in Table 4.6 increased
significantly over the years from 1961to 2004 except 1967, 1974, 1981,
1982, 1984, 1987, 1988 and 1990. The Exchange experienced grow from
19912004, the Stock Exchange has since 1989 become increasingly a
truly capitalist institution namely, a veritable medium for capital
mobilisation as opposed to wealth distribution. Through the joint efforts
of the Securities and Exchange Commission, and the Nigerian Stock
Exchange; capital market awareness has risen. The value of
transactions has increased considerably over the years. Table 4.6 reveals
that the value of transactions grew from =N=1.49million in 1961 to
=N=16.64million in 1970, =N=512million (1980), =N=610.3 (1989),
=N=6999.6million (1996) and rose significantly to =N=225820million in
2004. A comparison of 1961 figure to 2004 shows a 151556%. To
transform the Nigerian economy, turnover on the Nigerian Stock
Exchange rose by 87.1% in 2004 to =N=225.8billion. The comparable
figure in 2003 stood at =N=120.7Billion. The bulk of the transactions in
2004 was in equities which accounted for =N=223.8billion or 99.1% of
the turnover value. Government securities accounted for the bulk of the
value of trading up to 1991 before the private sector took over.
4.3 NUMBER OF DEALS
Table 4.7 reveals the volume of transactions in terms of number of
deals. Total deals struck on the Exchange also witnessed considerable
growth from 334 in 1961 to 634 in 1970 (89.8% increase), 7138 in 1980,
25930 in 1990, 256,523 in 2000 and 622227 in 2003. When compared
with that of 1961, it gave (186195% increase). This also supports the
claim that capital market has developed considerably over the years.
Industrial equities securities on the other hand dominated dealings on
the market from inception having accounted for as much as 100% in
1995 of total deals on the market and not less than 52.2% in 1969 in
the history of the exchange.
TABLE 4.7: VOLUME OF TRANSACTION (NUMBER OF DEALS) ON THE NIGERIAN STOCK EXCHANGE (1961 – 2004).
Year
Govt. Securities
% Industrial Equities securities
% Total
1961
92 27.5 242 72.5 334
1962
175 25.2 520 74.8 659
1963
296 41.6 415 58.4 711
1964
404 41.0 581 59.0 985
1965
391 38.4 627 61.6 1018
1966
501 45.7 595 54.3 1096
1967
336 44.0 427 56 768
1968
286 44.3 360 55.7 646
1969
307 55.5 246 52.2 553
197 303 47.8 331 78.6 634
01971
204 21.4 748 78.6 952
1972
258 28.7 640 71.3 898
1973
232 34.4 537 65.6 919
1974
256 8.4 2807 91.64
3063
1975
203 28.8 501 71.17
704
1976
321 31.6 696 68.4 1017
1977
337 20.4 1314 79.60
1651
1978
243 9.8 2230 90.20
2473
1979
124 3.8 3099 96.15
3223
1980
220 3.1 6918 96.9 7138
1981
118 1.2 10081 98.8 10199
1982
184 1.8 9830 98.2 10014
1983
292 2.4 11633 97.6 11925
1984
194 1.1 17250 98.9 17444
1985
340 1.4 23231 98.6 23571
1986
270 1.0 27448 99.0 27718
1987
238 1.2 20401 98.8 20639
1988
96 0.4 21465 99.6 21561
1989
174 0.5 33273 99.5 33447
1990
102 0.4 25828 99.6 25930
1991
45 0.1 44235 99.90
44280
1992
71 0.1 48958 99.9 49029
1993
39 0.1 40359 99.9 40398
1994
16 0.04 42058 99.96
42074
1995
0 0 49564 100 49564
1996
11 0.02 49504 99.98
49515
1997
6 0.01 78083 99.99
78089
1998
1 0.01 84934 99.9 84,935
1999
4 0.01 123505 99.99
123,509
2000
8 0.01 256515 99.99
256,523
2001
14 0.01 426,149 99.99
426,163
2002
3 451847 451850
2003
1 621716 622227
2004
222001
Source: The Nigerian Stock Exchange and CBN Annual Report and Statement of Accounts 19742004.
4.4 DEPTH OF MARKET (SECURITISATION)
TABLE 4.8: GROWTH IN THE NUMBER OF LISTED SECURITIES (19712005)
Year
Govt. Stock
Industrial Loans & Bonds
Equities Including SSM
Total
1961
6 3 9
1962
na n.a 4 n.a
1963
na n.a 5 n.a
1964
Na n.a 5 n.a
1965
17 5 6 28
1966
n.a n.a 6 n.a
1967
n.a n.a 6 n.a
1968
n.a n.a 6 n.a
1969
n.a n.a 7 n.a
1970
n.a n.a 8 n.a
1971
32 6 14 52
1972
n.a n.a 19 n.a
1973
38 8 25 71
1974
Na Na 33 Na
1975
17 35 35 87
1976
Na Na 34 Na
1977
Na Na 34 Na
1978
49 11 42 102
1979
53 12 81 146
198 54 12 91 157
01981
56 14 93 163
1982
57 18 93 168
1983
61 25 92 178
1984
56 27 92 175
1985
57 28 96 181
1986
58 29 99 186
1987
54 31 100 185
1988
51 35 102 188
1989
47 40 111 198
1990
43 43 131 217
1991
40 57 142 239
1992
36 62 153 251
1993
32 66 174 272
1994
29 70 177 276
1995
28 67 181 276
1996
24 69 183 276
1997
22 60 182 264
1998
19 59 186 264
1999
15 58 196 269
2000
12 53 195 260
2001
11 56 194 261
2002
10 53 195 258
2003
10 55 200 265
2004
n.a n.a 207 276
Source: The Nigerian Stock Exchange and CBN Annual Report and Statement of Accounts 19742004.
The total number of securities quoted on the stock exchange for the
period 19612004 as shown in Table 4.8. The total number of listed
securities increased from 9 in 1961, 60 in 1971 to 251 in 1992, 264 in
2001, 265 in 2003 and 276 in 2004, representing an increase of
2966.6%. Certain discernible patterns emerged from Table 4.8. First,
Government stocks have declined from 56 in 1981 to 36 in 1992, 19 in
1998 and 10 in 2003 to be supplanted by an increase in the industrial
loans and bonds from 14 in 1981 to 55 in 2003 and equities from 93 in
1981 to 153 in 1992, 200 in 2003 and 207 in 2004. This increase in
equity financing is a testimony of improved securitisation from 3 in 1961
to 207 in 2004 a 6800%. Second, the structural changes occurred
between 1986 and 1992, a period that coincided with the reforms.
Government stocks rose up till 1986 when the number listed peaked at
58 and thereafter started to decline. The unimpressive performance of
the market is attributable to such factors as the relatively low private
sector investment, infrastructural problems and perhaps most
important, the relatively low awareness about the stock market. Also
contributing was the reluctance of many indigenous businesses to seek
quotation by going public for fear of losing control of their companies.
TABLE 4.9: TURN OVER VOLUME OF STOCKS’ 000 (19872004.)YEAR GOVT. % INDUSTR
IAL% EQUITI
ES % TOTAL
1987 31413.3 88.67
12935.6 3.63 27221.9 7.7 354288.8
1988 223172.6
87.2 11611.4 4.5 21265.2 8.3 256049.2
1989 608632 92.1 27767.4 4.2 28155.4 3.7 660554.8
1990 149521.4
60.4 31157.5 12.6 66805.1 27.0
247484.0
1991 94653.8 54.5 10507.5 6.1 67647.9 39.4
172484.0
1992 93341.7 35.7 6820.0 2.6 161588.5
61.7
261,750.2
1993 95189.0 21.2 98281.8 21.8 256033.6
57 449504.4
1994 16300.7 3.1 177077.0 33.8 330884.3
63.1
524262.0
1995 00 00 50778.1 12.8 346085.8
87.2
396864.5
1996 93,753.0 10.7 55289 6.2 733450.8
83.1
882,492.8
1997 75529.0 6.1 72114.0 0.6 1,160,039.0
93.3
1,242,782.0
1998 16214.0 0.77 2.0 0.03 2,080,556.0
99.2
2,096,772.0
1999 939.0 0.03 0.0 00 3,929,508.0
99.97
3,930,447.0
2000 86550 0.2 0.0 00 4,988,278.0
99.8
4,996,933.0
2001 39358 0.67 0.0 00 5,890,828.0
99.33
5,930,186.0
2002 2559 0.04 500 0.01 6610989 99.86
6,620,009
2003 3000 0.02 61941.8 0.46 1323924.9
99.52
13304211.9
2004 19.21 Bill
Source: The Nigerian Stock Exchange and CBN Annual Report and Statement of Accounts 19872003.
Table 4.9 reveals that the volume of stocks has increased
tremendously from 354,288.8 shares in 1987 to 13304211.9 shares in
2003 and 19.2billion shares in 2004, a 5322.1% increase.
4.5 THE STOCK MARKET INDEX
TABLE 4.10: NSE ALL SHARE INDEX (19842003)
YEARS SHARE INDEX PERCENTAGE GROWTH
1984 100 1985 127.3 27.31986 163.8 28.671987 190.9 16.51988 233.6 22.31989 325.3 39.41990 513.8 57.91991 783.0 52.41992 1107.0 41.31993 1543.8 39.41994 2205.4 42.8
1995 5092.15 130.91996 6992.1 37.31997 6440.51 7.41998 5672.76 121999 5266.43 7.22000 8111.01 54.02001 10963.11 35.22002 12137.72 10.72003 20128.94 74.82004 23,844.45 18.5
Source: The Nigerian Stock Exchange Annual Report and Statement of
Accounts 19842004
The Nigerian stock exchange recently developed a regular stock
market index with 1984 as the base year. Incidentally, the period of its
existence so far coincides roughly with the period of financial reforms.
The index has increased remarkably during the period in question
(about 68 per cent annum). This increase in the price of financial
assets cannot be ascribed to inflation since the correlation between the
index inflation is low (with the coefficient of 0.46). We observed a close
correlation between the stock index and market capitalisation. A
correlation coefficient of 0.97 was computed. Earlier on, in this study,
we observed a close correlation (with the coefficient of 0.96) between
listings and market capitalisation, which is a measure of the horizontal
growth of the market. The correlation between the index and market
capitalisation will be a good measure of the vertical growth of the
market. Since the data used for the computation of the correlation
coefficients were taken over the same period, the results should
compare fairly accurately. Thus, we can conclude that the stock market
has grown both in breath and depth during the period of observation.
An N100 investment in the Nigerian capital market in 1984 will
now be worth not less than N21222.6. That is within the last 20years
the investor would have a minimum of 21222.6 percent returns on the
investment. Since the introduction of the All Share Index in 1984 it has
been a steady increase steady up warding only declining in the three
years between 1996 to 1998. An analysis of the movement of the All
Share Index shows it rose 413 percent in the six years between 1984 to
1990 from the base of 100 points in 1984 to a 1990 value of 513.8 points
and from 783.0 in 1991 to 12137.72 in 2002 an indication of 1550.1
percent rise. (See figure 4.6). The period 1991 to 1995 seems to have
been the best years of exchange as the all index appreciated 550 per
cent from a value of 783 points in 1991 to 5092.0 points in 1995.
The index however reversed its growth trend from 1996 to 1998 as
it fell 18percent from 6992.0 point in 1996 to 5672.7 points in 1998. In
the 14years history of the index these were the only years the exchange
experienced a decline. The heightened political uncertainty of the era
must have affected investors confidence in the economy, Abacha’s self
succession bid during this period and the incarceration of several
political prisoners all combined to create uncertainty in the socio
political environment which created uncertainty in the economy.
Besides, this period was also a period of tight fiscal and monetary
policy, which ensured people had little money to spend. The apex bank
through stabilisation instruments constantly mopped up what it
considered excess liquidity in the banking system. All these combined to
impact negatively on the capital market. But the return of an elected
democratic government in 1999 boasted investor’s confidence once
more. This soon translated in the resurrection of the index with renewed
strength as it shortup 54 percent from 5266.4 point in 1999 to 8111.0
point by 2000 and 10,963.11, 12,137.72, 20,128.94 and 23,844.45 in
2001, 2002, 2003 and 2004 respectively. See Table 4.10. The strength
was reinforced by the introduction of the Automated Trade system by
the Exchange in 1999 which put an end to the “open out cry” method of
trading and improved the settlement cycle for shares from more than six
weeks to six days initially (T + 5) (six days) and later (T + 3) four days.
The Nigerian Stock Exchange AllShare Index grow by 35.2 per cent to
close the year 2001 at 10963.11, 10.7% growth of 12137.72 in 2002,
74.8% growth of 20128.94 in 2003 and 87.1% growth of 23,844.45 in
2004. Altogether, the performance of the index was heartwarming,
especially against the backdrop of a series of upward adjustment in the
Minimum Rediscount Rate (MRR), which attracted funds away from the
capital market, among other economic problems associated with the
high interest rate in the economy.
TABLE 4.11 MACRO ECONOMIC VARIABLES AND CAPITAL MARKET INDICATORS
Year
Real GDP
Interest Rate
POT EXRATE
MC/GDP
Trans.VT/GDP
TurnoverVT/MC
Listing
Inflation
1971
65707.0
n.a n.a n.a n.a n.a n.a n.a n.a
1972
69310.6
n.a n.a n.a n.a n.a n.a n.a n.a
1973
73763.1
n.a n.a n.a n.a n.a n.a n.a n.a
1974
82424.8
4.50 0.00 0.63 1.40 0.28 18.60
33.00
13.40
1975
79988.5
3.75 0.00 0.62 1.40 0.30 20.30 35.00
33.90
1976
88854.3
3.50 0.00 0.63 1.70 0.42 24.40 34.00
21.20
1977
96098.5
4.00 0.00 0.65 1.80 0.57 29.20 34.00
15.40
1978
89020.9
5.00 0.00 0.61 2.90 0.55 17.70 42.00
21.20
1979
91190.7
5.00 0.00 0.60 6.00 0.60 9.70 81.00
11.80
1980
96186.6
6.00 0.00 0.55 8.70 0.80 8.70 91.00
9.90
1981
70395.9
6.00 0.00 0.61 9.70 0.60 6.10 93.00
20.90
1982
70157.0
8.00 0.00 0.67 9.70 0.42 5.30 93.00
7.70
1983
66389.5
8.00 0.00 0.72 9.20 0.70 7.50 92.00
23.20
1984
63016.4
10.00
0.00 0.76 8.60 0.41 4.60 92.0 39.60
1985
68916.3
10.00
0.00 0.89 9.20 0.44 4.80 96.00
5.50
1986
71075.9
10.00
151.60
2.02 9.30 0.70 7.30 99.00
5.40
1987
70741.4
12.75
4353.10
4.02 7.60 0.36 4.60 100.00
10.30
1988
77752.5
12.75
2611.80
4.54 6.80 0.09 1.30 102.00
38.30
1989
83495.2
18.50
1618.80
7.39 5.70 0.27 4.70 111.00
40.90
1990
90342.1
18.50
435.20
8.04 6.00 0.09 1.40 131.00
7.40
1991
94614.1
14.50
594.90
9.91 7.10 0.07 1.00 142.00
13.00
1992
97431.1 17.50
36851.80
17.30 6.00 0.09 1.50 153.00
44.60
1993
100015.2
26.00
396.40
22.05 6.80 0.11 1.70 174.00
57.20
1994
101330.0
13.50
203.50
21.89 7.20 0.11 1.50 177.00
57.00
1995
103510.0
13.50
5785.00
21.89 8.70 0.09 1.10 181.0
72.80
1996
107020.0
13.50
12056.60
21.89 12.3 0.25 2.40 183.00
29.30
1997
110400.0
13.50
4785.80
21.89 10.30 0.36 3.50 182.00
8.50
1998
112950.0
19.25
637.50
21.89 9.50 0.49 5.10 186.00
10.00
1999
116400.0
18.00
1015.80
98.20 9.30 0.43 4.70 195.00
6.60
2000
12059.0
14.00
51080.70
102.10
9.80 0.58 6.00 195.00
6.90
2001
12572.0
14.00
92518.90
111.96
19.10 1.05 8.70 194.00
18.90
2002
12983.0
16.5 16149.5
120.97
12.94 1.02 8.7 195 12.2
2003
5734.17
15 18996.52
129..36
23.7 2.3 9.8 200 23.8
2004
151912.8
n.a n.a n.a 13.9 1.48 10.7 207 na
Source: Securities and Exchange Commission Publication 19742003. Central Bank of Nigeria Statistical Bulletin Vol. 5 No. 2 Dec., 1994
Vol. 11 No. 2 Dec., 2000
CBN Annual Reports and Statement of Accounts 19742003. n.a: not
available.
Table 4.11 help us to explain the relationship between capital
market indicators (such market capitalisation, transactions, turnover,
and listing) and economic growth (GDP at factor cost), growth rate, and
other macroeconomic variables such as interest rate, portfolio
investment (POT), exchange rate (EXRATE), bank branches and
inflation. A thorough examination of Table 4.46 reveals that capital
market development is positively and robustly associated with economic
growth. For example, market capitalisation/GDP ratio was 8.6% in
1984, 2001 it was 19.1% whereas in 2003 it was 25.2%.
4.6 PORTFOLIOS AND DIRECT INVESTMENT
TABLE 4.12 NET DIRECT INVESTMENT, NET PORTFOLIO INVESTMENT AND MARKET CAPITALISATION
Year
Net portfolio investment Nm (1)
Net direct investment Nm (2)
Total debt (External) Nm (3)
Market capitalisation Nm (4)
1 as % of 4 (5)
2 as % of 4 (6)
1 as % of Total External Debt (3)
1986 151.6 735.8 41452.4
6794.8 2.2 10.8 0.4
1987 4351.3 2452.8 100789 8297.6 52.4 29.5 4.3
.11988 2611.8 1718.2 133958
.310020.8
26.0 17.1 2.0
1989 1618.8 13877.4
240393.7
12848.7
12.6 108.0 0.6
1990 435.2 4686.0 29814.4
16358.4
2.6 28.5 0.1
1991 594.9 6916.1 328054.3
23124.9
2.5 29.9 0.1
1992 36851.8
14463.1
544264.1
32560 113.2 46.2 6.7
1993 377.0 29660.3
633144.4
46900 0.8 63.2 0.06
1994 203.5 22229.2
648813.0
65500 0.3 33.9 0.03
1995 5785 75940.6
7167756
171100 3.4 44.4 0.8
1996 12055.2
111297.8
617320.0
285600 42.2 390.0
19.5
1997 4780 110455.2
575931.6
292000 1.6 37.8 0.8
1998 637.1 80751.1
633017.0
263300 0.2 30.7 0.10
1999 1015.8 92795.3
2577383.4
299900 0.3 30.9 0.04
2000
51080.7
115955.7
309383.8
472900 10.8 24.5 16.5
2001 92518.92
132433.65
3176291.0
662600 14.0 20.0 2.9
2002
16119.5
225035.47
3732884.8
763900 21,1 29.4 .41
200 18996. 259250 447832 1,359,0 14.0 19.1 .42
3 52 .38 9.3 00Source: (1) Central Bank of Nigeria Statistical Bulletin 19942003
(2) Central Bank of Nigeria Annual Report and Statement of
Accounts 19942003
Table 4.12 reveals the impact of market capitalisation on Net direct
investment, Net portfolio investment and Total debt (External) in Nigeria
between 19862003.
The last element in our analysis has to do with the role that the
opening – up of stock markets play in attracting foreign capital inflow,
i.e., the extent to which reforms have aided the growth of portfolio and
direct investment. The purchase of securities on local stock markets
with the help of capital from abroad including in some cases domestic
capital flight has become a veritable alternative source of investment for
Nigeria since the beginning of the debtcrisis in the early 1980’s. With
the drying up of bank loans and the looming task of servicing huge
debts, the opportunity of receiving non – debt – creating capital flows is
one that some LDCs have gladly embraced. This has duel implications
as export – oriented firms can take advantage of this source of funds. In
addition, since the stock market could provide attractive domestic
vehicles of investment, portfolio investment may help to check capital
flight (Alawode, 1995). Over the years as revealed in Table 4.12 foreign
portfolio investment has improved credit worthiness of companies,
increase their liquidity due to increase demand for equities by
foreigners, and more efficient mechanism to raise capital for the private
sector, as foreign investors create a demand for more inclusive market
information, financial reporting and security analysis on capital market.
4.7 EMPIRICAL RESULTS AND ANALYSIS
Explaining the process of economic growth is an intricate issue.
This is because many variables can be used to explain economic growth.
However, the link between capital market development and economic
growth is derived from the services capital market provides to the
economy as a whole. The capital market helped in mobilising resources
in the economy and allocates such resource in the most efficient ways to
competing sectors of the economy. The confirmation of this assertion as
pertains to Nigeria for the period between 19712004, was set out in a
model of eleven equations which has its dependent variable real gross
domestic product (Y) and capital market development indicators (market
capitalisation (X1), Transaction value (X2), Turnover (X3) and Listed
companies (X4).
Before presenting the result of the models used, it was found out
that the variable to be analysed were strongly correlated as shown in
Table 4.13.
TABLE 4.13 MATRIX OF CORRELATION COEFFICIENT
Y X1 X2 X3
X1 .808 X2 .740 .986 X3 .204 .049 .011 X4 .772 .566 .480 .648
The results in Table 4.13 shows that market capitalisation (X1)
transaction value (X2) and Listing (X4) are strongly and positively
correlated among each other while Turnover (X3) revealed a weak but
positive correlation with economic growth. X1 and X2 in relation to X3
also indicate a weak but positive correlation.
Using equations 411 we examine the effects of shock to Real GDP
and capital market indicators market capitalisation (X1), transaction
value (X2), turnover (X3) and number listed companies in Nigerian stock
exchange (X4). See model formulation chapter 3.5. With these
preliminary findings, we now present the main results in Table 4.14.
Table 4.14 indicates the results obtained from Granger’s causality test.
It should be noted from the result that the more the Fratio, the more
the Granger cause or the more the influence or domination. From the
results we found out that economic growth influences market
capitalisation and market capitalisation in turn influences economic
growth thereby confirming the bidirectionality in the causation. From
the higher value of Fratio, we conclude that in the causality between
market capitalisation and economic growth, market capitalisation
dominates. In the case of economic growth versus transaction value it
was found out that economic growth Granger cause transaction value
and at the same time transaction value Granger cause economic growth
but transaction value Granger cause economic growth the more as
reveal in Table 4.14. A comparison of the Granger effect of economic
growth and turnover, there is a bidirectionality in the causation but
economic growth dominates turnover. The last capital market
development indicator also indicates similar trend between economic
growth and listing. Economic growth Granger cause listing while
invariably listing also Granger cause economic growth but listing
dominates.
Causality between Capital Market Indicators and Economic Growth
TABLE 4.14 PAIRWISE GRANGER CAUSALITY TESTS SAMPLE 1971
2004
Variable Obs FStatistics PValueEconomic Growth (Y) Real GDP cause Market Capitalisation
34 65.592 0.000
Market Capitalisation Causes Real GDP
34 236.859 0.000
Economic Growth (Y) Causes Transaction Value
34 55.869 .000
Transaction Value Causes Economic Growth
34 275.945 .000
Economic Growth Causes Turnover
34 34.854 .000
Turnover Causes Economic Growth
34 5.292 .000
Economic Growth Causes Listing
34 36.924 0.005
Listing Causes Economic Growth
34 613.327 .000
See Appendix 3
From the above findings, the Null hypothesis that states that
economic growth does not Granger cause capital market development or
capital market development does not Grangercause economic growth is
hereby rejected, while the alternate hypothesis that states that economic
growth does Granger cause capital market development or capital
market development does Grangercause economic growth is hereby
accepted.
Applying Ordinary Least Square (OLS) regression on equation 1
Yt = βo + β1X1t + β2X2t + β3X3t + β4X4t +Ut
………………………………...(1)
We have the following result:
TABLE 4.15 REGRESSION RESULT
Method: Least Squares Regression
Dependent Variable: Real Gross Domestic Product (Y)
Independent Variables (X1, X2, X3, X4)
Sample Period: 19712004
Observations: 34Variable Coefficient Std Error tstatistics PValueConstant 57996.281 8258.199 7.023 0.000X1 .00.06317 .034 1.862 .073X2 383 .308 1.242 .224X3 455.662 246.843 1.846 0.075X4 210.582 63.326 3.325 .002RSquared .842. Standard Deviation 21248.9647
Adjusted RSquared .820. FStatistics 38.605. DurbinWatson
Statistics .792
Source Computed print out: Appendix 3.
A dynamic modelling using the variables at their levels would
result in spurious regression as indicated in Table 4.15. With 84.2
percent Rsquared and 82.0 percent Adjusted Rsquared, the result
indicated that the economic growth in Nigeria is adequately explained by
the model for the period between 19712004. By implication 82.0
percent of the variation in the growth of economic activities is explained
by the independent variables.
Based on this result it can be clearly show that there is a strong
relationship between capital market development and long run economic
growth. Thus, Ho is rejected while Hi is accepted.
Table 4.16 reports independent correlation between economic
growth and the various index of capital market development using
ordinary least squares. The result show that all the four measures of
capital market development was positively related to economic growth.
Table 4.16 reports the simple regression estimates for various indices of
capital market development run against economic growth. The results
showed that all the capital market development indices (X1, X2, X3 and
X4) had positive influences on economic growth. Though Turnover X3
showed a negative influence as the tvalue is
– 1.181
TABLE 4.16 ESTIMATE OF REGRESSION PARAMETERS AND
RELATED STATISTICS
Dependent variable: Economic growth (Y)
Coefficient Tvalue PvalueConstant 85329.586 32.780 0.000X1 0.04210 7.765 0.000C 87402.549 30.231 0.000X2 0.386 6.220 0.000C 97942.713 18.165 .000X3 414.414 1.181 .246C 61084.008 11.348 .000X4 278.670 6.871 .000 See Appendix 4
Table 4.17 presents the results obtained from the firstdifference
regression estimation of our equation (3). The regression estimates
revealed that all the variables had expected apriori signs but two of the
variables Turnover and Listing showed significance influences on long
run economic growth.
TABLE 4.17 FIRST DIFFERENCES (OLS) REGRESSION
ESTIMATES OF THE RELATIONSHIP BETWEEN ECONOMIC GROWTH AND CAPITAL MARKET DEVELOPMENT
Variable Parameter Estimate
Tvalue Probability
Constant 3830.858 1.849 .075X1 0.01260 0.269 .790
X2 0.04950 124 .902X3 610.320 4.5869 .000X4 66.958 .359 .722*Variable significant at 5% level of significance 0
Source: Computer Print out. See Appendix 5
Using the first difference to test hypothesis 1 it was found out that 3.69
or 36.9% R2 there is a weak relationship between capital development
and long run economic growth in Nigeria. Therefore, we reject Null
Hypothesis, while Alternative hypothesis is accepted.
Stability of the Results
The Chow test was employed to stability of the results of our
analysis we choose 1986 as the suitable break in the Nigerian economy
because of a guided the regulation policy of the government the
Structural Adjustment Programme in September of that 1986 and
estimated it against an enlarged sample 19712004. To test for stability
in the structural parameters, we use Fratio.
Fratio = ( eΣ 2 Σe12)/(nn1)
eΣ 12/(n1 – k)
Where n is the sample size 19712004 and k is the number of
parameters (i.e5)
567000000 –145000000/34 –16
145000000/165
= 567000000 –145000000/18
145000000/11
= 422000000/18
13181818.18
= 23444444.44
13181818.18
= 1.778
Approximately 1.8
Table F = F 0.05, 11, 18 = 2.72
i = i i = i
i = i
n n1
n1
=
Cal F < Table F
From the computation, we have Fratio = 1.8 < F o.o5, 18,11 = 2.77
Thus, the structural coefficients are stable; their values do not change
significantly in the expanded sampled period. See Appendix 6
4.9 DISCUSSION OF FINDINGS
The study reveals that capital market in Nigeria has grown
substantially during the reform period in terms of its capital
mobilisation capability as reflected in all the measures of capital
formation: depth (market capitalisation, securitisation and listings);
breadth as measured by asset pricing characteristics such as stock
market index and internalisation as depicted by the sizeable increases in
net portfolio and direct investment: more importantly, we related these
characteristics to the growth in real variable such as GDP and found
that the contribution of the financial variables was quiet reasonable
during the reform program. We were able to link these performances to
some of the major policy option undertaken during the adjustment
program. These include the deregulation of interest rates which forced
nonfinancial firm to go to equity market given the high cost of capital as
a result of high interest rates on bank loans thus, leading to a reduction
in their debt/equity ratios, a more favourable environment under
deregulation for firms seeking listing on the stock exchange which led to
increased listings, privatisation and debt conversion programs which
increased securitisation and direct as well as portfolio investment and
institutional factors such as regulatory as supervisory arrangements
which defined the arena of operation and stipulated the rules of the
game. The results presented and analysed underscore the strategic role
of capital market development in the growth of economic activity. These
results confirm the proposition of Levine and Zervos (1996) about the
positive relationship that is expected between the functioning of capital
market and economic growth. The result generally proved that one of the
most important determinants of output growth or economic growth is
the availability of a welldeveloped capital market. Although these
growth regressions imply a strong link between capital market
development and economic growth, the results should be viewed as
suggestive partial correlation’s that stimulate additional research rather
than as conclusive findings.
Market legislation over the years has transformed the Nigerian
capital market. The recent pension reform legislation has created a
potential avenue for broadening and deepening the market. Since
returns in equities are neither related to inflation rate nor associated
with inflationrisk premium, equities are not inflation hedge. High
inflation rate could have negative effect on investment in the securities
market.
The turnover rate is low in Nigeria ranging from 29.2 in 1977 to
10.7 in 2004. There is no reason to expect that the turnover rate should
be high in Nigeria as people buy shares to keep as a form of wealth or
income rather than the expectations of capital gains. Transactions tend
to be concentrated on the most soughtafter securities, the ‘blue chips’.
Both at the firm and the economy levels, the yearly increase of
security price movements indicates that the Nigerian stock exchange is
healthy. A lasting price rise signals economic recovery while a fall warns
of an imminent depression. The stock index represents yield on financial
investment while the GDP represents that on physical investment, a
reflection of the production capacity of the economy.
The forces of globalisation, technology, changing investor
demographics; and new forms of competition are transforming capital
markets worldwide. Global economic integration facilitates the
importation of capital and intermediate goods that may not be available
in a country’s home market at comparable cost. Also global markets
improve the efficient allocation of resources, capital markets are in
various ways responding to the following issues arising from their
rapidly changing environment.
One of the challenges of capital markets is the ability to mobilise
longterm financial resources for allocation to the private sector for
growth and poverty alleviation. The benefits of regionalisation and
globalisation are as follows: increased foreign direct investment; greater
inflow of foreign capital to the domestic capital market; active
participation of foreign financial institutions in our financial services
industry; share the wealth of experience from the rest of world on
managing capital market institutions; globalisation is seen therefore as a
source of better knowledge of how capital markets are efficiently
managed. Capital market globalisation and regional integration would
lead to improved market liquidity. Absorption capacity would increase
leading to greater demand for products trading on the market and hence
greater volume of activities. Globalisation would also mean that Nigerian
participants would have access to international assets.
Globalisation of the capital markets would also lead to opening of
Nigerian capital markets to the outside would. This would result in the
integration of the Nigerian economy into the world economic system.
Instead of relying on government–borrowed funds and economic aid
from donor countries, globalisation would attract foreign inflows of
capital and the elimination of inefficient operations. International
capital markets would direct international capital to firms and sectors of
the economy where they can be utilised more efficiently. Globalisation of
capital market would stimulate productivity, efficiency, and economic
growth. It also means that Nigerian firms would be able to compete
globally for financial resources. It should be noted therefore, that, it is
only the efficient firms that would have access to international capital
products. This will lead to improvements in corporate governance
leading to better utilisation of resources and ultimately economic
growth. Globalisation and regionalisation would promote confidence in
the Nigerian capital market. This would enable domestic firms to access
cheaper financial resources, improve employment opportunities and lead
to free movement of capital. The benefits of globalisation of capital
markets can only be enjoyed when there is proper monetary control
mechanism, if not globalisation of capital markets would lead to foreign
domination or colonial imperialism and more sophisticated and
developed capital markets are likely to benefit at the expense of less
developed markets. In a global capital market, unfair market practices
would strive unless efforts are made to prevent them. Globalisation of
capital markets may thwart the domestic capacity for participation in
the market. The growth of wide share ownership in the domestic market
may also be jeopardised.
Globalisation may also lead to increased capital flight when capital
markets are globalised. The three factors inhibiting against international
trading of stocks are transaction costs, information costs and exchange
rate risk. It should be noted too that when capital markets are
globalised; firms that are more efficient are likely to attract domestic
resources abroad. The potential capital gains and dividends on
investment attract more foreign investors. When these are exported
abroad, significant financial resources could flow abroad. Greater
opportunities for money laundering accompany the globalisation of
capital market. In the light of these negative issues raised, it is
suggested that there is need for gradual approach to globalisation of
capital markets in Nigeria; national priorities should be encouraged;
incentives should be devised to encourage market participants to where
in a manner consistent with national interests and priorities.
The overriding objective of financial reform and capital market
development is to ensure that financial services in terms of mobilisation
and allocation of credit to the productive sectors of the economy are
enhanced. Thus, the anticipated goal is to increase longterm capital to
the private sector for expansion of productive opportunities, which will
increase the welfare of the people. However, our study shows that
financial sector liberalisation and capital market development strategies
have been accompanied by unintended consequences. These resulted in
a new class of displaced workers, which has policy implications of social
concerns of liberalisation and poverty issues in Nigeria. None of earlier
studies have addressed equity and poverty issues associated with capital
market development and financial sector reform. Thus, the question
arises as to whether the policy changes have contributed to poverty
increase. However, a general analysis and observation of the stylised
facts of the demographics of the Nigerian population would show that
the majority of the population in Nigeria is poor and live at subsistence
levels. Thus, the low income of the majority of the population limits their
participation in the formal capital markets. The situation is even worse
in the rural areas where most of the resident live in abject poverty.
Thus, equity considerations would not only imply raising incomes in
general (in urban and rural areas) but also designing policies that would
give access to potential rural investors. This would require making the
capital markets reach the rural people. This requires heavy investments
in physical infrastructure (roads, telecommunications, financial
institutions, and information media), which at the present, are biased in
favour of urban areas.
In terms of raising longterm capital through the issues of
securities, data shows that the structure of stock exchange in Nigeria is
not well suited for small enterprises to raise capital. Unlike the U.S. for
example where the existence of capital markets for small and medium
enterprises enable them to raise capital, such institutions that
specialise in providing credit to small and mediumsized enterprises are
not doing much as expected in Nigeria. As a result, small and medium
sized enterprises and lowincome people are marginalised in the formal
capital markets. A useful role for the government is to pursue a second
best strategy of developing financial products that may be suited for
those small and medium enterprises that may not be able to raise credit
in the securities market or the formal credit market. Such institutions
may include the establishment of overthecounter stock exchanges with
fewer requirements for listing and rising of longterm capital in the
formal capital market. In addition, government guaranteed programs
through small business development centres may provide useful
functions for financial intermediation that may be suited to small and
mediumsized firms. We recognise the important role being played by
some financial NonGovernmental Organisations (NGOs) to engage in
financial intermediation, credit extension, and promotion of income
generating ventures, which are aimed at fighting poverty in Nigeria. Most
of the beneficiaries are individuals who belong to women groups or
cooperative groups. The urbanbased poor could take advantage of the
growing financial and credit NGOs that seem to concentrate in the
urban areas and are targeted to specific socioeconomic groups,
including women who are unemployed in the formal sector. Some of the
NGOs have succeeded so far in penetrating into the informal sector
thereby harnessing the economic potential that the formal sector would
otherwise bypass. Furthermore, the financial NGOs, more than the
formal financial institutions, have penetrated into the informal sector. As
such, these financial NGOs can possibly be another medium for poverty
alleviation in Nigeria.
Economic growth has been regarded as the basis or essence of
economic development. Economic growth is essential to reduce and
alleviate poverty. Economic growth is, many times influenced by stock of
capital and opportunities for investment in a new capital. Growth of an
economy may be stunted when new investment opportunities are neither
discovered nor created. The central government should modify and
influence the macro behaviour of economic aggregates in order to
achieve the objectives of national economic efficiency and prosperous
national income per capita. If investment opportunities expand, and the
marginal efficiency of capital increases (due to vast unexploited
investment opportunities in the land of possibilities), then capital
accumulation may influence economic growth positively. Therefore,
quantity of capital per worker, quality and quantity of human capital as
an embodiment of technical change social and legislative/legal
institutions should contribute to growth of the national economies.
Generally, efficient capital markets offer the following advantages: It
creates an enabling environment for fast, sustainable and socially
equitable economic growth; it mobilise savings including small savers by
providing financial intermediation between deficit and surplus units of
the economy; it promotes an efficient translation of savings into venture
capitals, thus stimulating steady flow of investible funds into productive
sectors; it brings into a sharper focus our need to finance domestic
entrepreneur as a complimentary thrust of poverty reductions, social
development and environmental sustainability in a multiyear process.
Economic growth strategy can be developed by empowering our
own domestic entrepreneur to thrive, improves life and grow our
national income while the government only provide and sustain an
enabling environment. Fiscal discipline impacts positively on the
restructuring the composition and distribution of savings between
money market and capital market enhance stable general price level,
and general stable macro economic environment. Federal government
should desist from committing huge unbudgeted expenditures on
wasteful and nonproductive ventures as these tend to put unnecessary
pressure on macro economic indices. Fiscal indiscipline encourages
official corruption. The executive and the legislature should be willing
to operate and act within the 1 units of the “rule of law” to ensure
reliable budgeting process with integrity. A successful poverty reducing
strategy in Nigeria will require a strong and focused emphasis on
economic growth, access to social services and infrastructure and
targeting.
TABLE 2.1 THE 20 MOST CAPITALISED COMPANIES IN 2004.
COMPANY MARKET CAPITALISATION (N’Bn)
1. NIGERIAN BREWERIES PLC 323.67
2. GUINNESS NIGERIA PLC 138.04
3. FIRST BANK OF NIGERIA PLC 94.43
4. ZENITH BANK PLC. 94.14
5. UNION BANK NIGERIA PLC 93.96
6. NESTLE NIGERIA PLC 79.06
7. NIGERIAN BOTTLING CO. PLC 75.03
8. GUARANTY TRUST BANK PLC 70.14
9. OANDO PLC 64.11
10. TOTAL NIGERIA PLC 61.96
11. CADBURY NIGERIA PLC 59.05
12. CONOIL PLC 53.92
13. UNILEVER NIGERIA PLC 46.91
14. STANDARD TRUST BANK PLC 44.46
15. MOBIL OIL NIGERIA PLC 44.23
16. TEXACO NIGERIA PLC 42.92
17. OCEANIC BANK INTERNATIONAL NIGERIA PLC 37.80
18. AFRICAN PETROLEUM PLC. 29.81
19. INTERCONTINENTAL BANK PLC. 28.03
20. UNITED BANK FOR AFRICA PLC 26.92
Source: The NSE…Stock Market Review 2004.
TABLE 2.2 20 MOST ACTIVE STOCKS IN 2003
COMPANY TURNOVER
1. STANDARD TRUST BANK PLC 1.036 billion shares
2. IMB INTERNATIONAL BANK PLC 931.7 million shares
3. LIBERTY BANK PLC 820.2 million shares
4. UNION BANK PLC 799.5million shares
5. FIRST BANK OF NIGERIA PLC 727.6 million shares
6. OMEGA BANK PLC 653.3 million shares
7. ACCESS BANK PLC. 641.5 million shares
8. UNITED BANK FOR AFRICAPLC. 632.6 million shares
9. GUARANTY TRUST BANK PLC 580.4 million shares
10. COOPERATIVE BANK PLC. 538.0 million shares
11. UTC NIGERIA PLC 531.7 million shares
12. WEMA BANK PLC 498.1 million shares
13. NIGERIAN BREWERIES PLC 495.3 million shares
14. GULF BANK OF NIGERIA PLC 441.1 million shares
15. MANNY BANK PLC 439.4 million shares
16. FSB INTERNATIONAL BANK PLC. 397.3 million shares
17. INTERCONTINENTAL BANK PLC 384.1 million shares
18. INLAND BANK NIGERIA PLC 348.2 million shares
19. CHARTERED BANK PLC. 347.8 million shares
20. NAL BANK PLC 276.7million shares.
Source: The NSE…Stock Market Review 2004.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1 SUMMARY
The study examines the relationship between capital market
development and economic growth in Nigeria between 19612004. The
study from the time series results, confirms that there exist positive
relationship between economic growth and the measures of capital
market development used. Secondary sources were used to collect data
for the study. Considering the above analysis, the study found that the
policy changes in Nigeria have had positive impact and challenges on the
capital market development. The passage of various regulatory laws and
reforms such as: Exchange Control Act of 1962, Indigenisation Decree,
Structural Adjustment Programme 1986, Privatisation and
Commercialisation Degree of 1988, Nigerian Enterprises Promotion
Decree (NEPD) 1989, Deregulation of Capital Market in 1992, Nigerian
Investment Promotion Commission Decree and the Foreign Exchange
Monitoring and Miscellaneous Provision Decree of 1995 and other
relevant reform laws have provided strong legal foundations for efficient
development of the capital market in Nigeria. The policy changes of
liberalisation (guided deregulation) of financial institutions, interest
rates and other sectors of the economy resulted in more players in the
capital market. The emergence of various financial and capital market
institutions (NSE and SEC) has enhanced the capacity for competitive
environment in the capital market.
The establishment of the Nigerian Stock Exchange in 1961 marked
an important milestone in the effort toward the development of a
functioning capital market for the mobilisation and allocation of long
term capital to the private sector. During the 44years of its
establishment, 276 securities and 207 companies have been listed on
the NSE as at 2004. Turnover value attained a historic level of
N225.82billion, up by 87.1% from the N120.70billion achieved in 2003.
The bulk of the transactions were in equities, which accounted for
N223.8billion or 99.1% of the turnover value. The total markets
capitalisation increase by 55.5% from N1.359trillion (2003), to
N2.112trillion in 2004. The Nigerian Stock Exchange AllShare Index
grew by 18.5% to close the year 2004 at 23,844.45 when compared with
20,128.94 in 2003. This study shows that regional integration and
globalisation of the Nigerian capital market would be beneficial in terms
of attracting foreign capital, efficiency of utilisation of capital and
corporate governance. Foreign participation would also encourage
domestic participation in the capital markets.
The results confirm the hypotheses that:
1) There is a strong relationship between capital market development
and longrun economic growth.
2) That economic growth Granger cause capital market development
and capital market development Granger cause economic growth.
The regression analysis showed that there is positive relationship
between economic growth and capital market development. Also the
coefficient of correlation exhibited 82.0% association of economic growth
with capital market development. The regression obtained would remain
reliable for Nigeria in forecasting future economic growth.
That study also reveals that:
* There is a dearth of shares in the market as a result of the buy and
hold’ attitude of shareholders.
* The efficiency of any capital market is dependent upon the degree
of information flow within it. Therefore increasing the supply of
securities in the market and improving their liquidity requires
efficiency in the flow of information to the investors and operators
of the market. Information flow is paramount if the market is to
perform its essential function of allocating resources amongst
competing needs in a manner consistent with the differential
profitability of those needs and relevant to their degree of risks.
The ability of the Federal Government of Nigeria to provide an
attractive and enabling environment to woo foreign investors while
safeguarding national interests is therefore a critical issue. While
campaigning for foreign investments, the Exchange should not be
mortgaged into another bane of economic imperialism. Nigeria needs
more external equity investments by way of venture capital companies or
direct equity portfolio investments via stocks and bonds quoted on the
Nigerian Stock Exchange. The Nigerian economy is clearly over leveraged
(with foreign loans) and as such attention must be paid to the need to
increase the use of equity, not debt instruments, in the development of
our economy.
5.2 CONCLUSION
The capital market is the section of the financial system, which
provides medium to longterm fund for the investment need of business
and government. The prime objective of capital market is to improve a
nation’s capacity for capital formation and efficient allocation of such
capital. A functioning capital market with its many players provide an
additional channel for encouraging and mobilising domestic savings for
productive investment, and this represents a complement to bank
deposits, real estates, investment and other financing options. It also
improves access to finance for new and smaller companies and
encourages capacity building. It provides the necessary elements to
manage financial risk. It ensures continuity of the enterprise long after
the founder (e.g. Cadbury, John Holt, Leventis). It provides funds to
government and companies at more attractive terms. It is the best
source of funding for SME growth. Capital market discipline improves
chances for success and its proven social responsibility e.g. 195 quoted
companies contribute more than 70 percent companies income tax
(Oladejo 2002). The Nigerian capital market is a safe haven that
guarantees ones future wellbeing and growth in the area of enduring
wealth creation. It also enables the individual investor to enjoy the
benefits of capital formations while quoted companies enjoy perpetuity,
since the risk is spread and the death of a promoter would not lead to
the collapse of the company.
To foster economic growth, capital market certainly need to be
deepened despite the problems of illiquidity, buyandhold attitude of
investors, lack of investor awareness of the exchange, thinness of
trading, infrequent trading, lack of absorption, low demand for equity
securities worsened by the long absence of government patronage from
bond market. This is a disincentive to attract new companies and
investors to the stock market. The government policy of favouring high
yield government shortterm Treasury bill on government securities also
provides a disincentive for investing in the Nigerian stock Exchange. To
solve these problems there is need for concerted efforts on the part of
the government to adopt sound economic policies of inflation, control,
stable foreign exchange management and balanced budget approach,
which invariably will lead to effective mobilisation of savings for
investment and enhance the confidence of the public in the stock
market.
Since real domestic savings depends on real growth of the
economy, efforts in achieving and sustaining high real growth should be
intensified. The sanitation of the financial system operation should be
pursued vigorously to reestablish confidence in the system.
Government should also be clear in it positioning of the Central Bank of
Nigeria as the apex institution for effective responsibility assignment.
The vision of the country should be to create and operate a highly
responsive, respected and sustainable financial sector services delivery.
The philosophy underlying the development of capital market in Nigeria
is that a capital deficient economy like Nigeria is prone to capital flight
and misapplication, hence, attention should be paid to capital market as
an avenue for rapid, broad based sustainable development through fair,
orderly and transparent capital market operations by all market
participants. Suffice it to say, it is obvious that the Nigerian capital
market is the cornerstone of finance and investment since business,
small or big, private or public, indigenous or multinationals need funds
for survival and growth.
5.3 RECOMMENDATIONS
Some recommendations derivable from the results of the study are
given as follows:
There is need for increased publicity to encourage general participation
in the capital market to create the needed awareness among the
investing public and government. People must be enlightened and
educated to remove the longstanding misconception that the capital
market is for rich people, who have enough money to trade in stocks.
Efforts should be directed at reorientating entrepreneurs to take
advantages of the capital market in their funding needs; rather than the
money market. Nigerian entrepreneurs should be encouraged to list
their stocks on the stock market as this does not amount to losing
control and relevance. Regulatory authorities should be encouraged to
perform their functions properly in order to advance the development of
the market.
The government should make a provision to allow certain financial
intermediaries (investment banks and stockbrokers) to create special
investment funds which investors can purchase again with tax credit,
for purchasers of securities of which at least 40 percent of the funds
in smallmedium sized enterprises. This may reduce the propensity to
buyandhold if there are adequate securities to trade and speculate in.
In addition, the government should encourage the setting up of Venture
Capital Companies (VCC) by investing in such companies and later
divesting itself as the VCC’s become highly remunerative. This would
not only add breadth to the market but boost economic growth.
There is need for equalisation of tax policies on interest income on
government securities and dividend on equity securities with a view to
encourage investment in the capital market.
The Nigerian capital market should be repositioned in terms of
complete moral regeneration of operators, which calls for integrity,
honesty, uprightness, incorruptibility, transparency, accountability, and
the pursuit of fair play and respect for rules and regulations. The
management of the NSE should maintain a constant check on what goes
on in the CSCS, which serves as the central nervous system of trading
activities. The SEC should maintain strict surveillance over the
securities market to ensure orderly – fair and equitable dealings in
securities and to ensure that the integrity of securities market is
protected against any abuses arising from the practices of insider
trading. There is need for qualitative monitoring of companies by
ensuring sanity and where dividend is declared, it should honour such.
SEC and NSE should be more strict with brokers and other companies
who erred through appropriate sanctions in order to remove undesirable
element that might create problem in it so as to sustain fund seekers
and restore investor’s confidence in the market. The SEC and NSE
should ensure compliance to the code of corporate governance and
international business practice, as this will go a long way in ensuring
investor’s confidence as well as making the capital market attractive to
international investors. The NSE should work towards the realisation of
the floorless trading to achieve the internationalisation of the NSE.
There is need to upgrade the Automated Trading System (ATS) and
Central Securities Clearing System (CSCS) to allow for faster and more
efficient trading of equities, debentures and bonds electronically. There
is need to put in place adequate monitoring procedure to ensure that
investors are not short changed on their investment as was the case in
the N380million Bonkolans scam in which several investors were
defrauded.
The government should complement NSE efforts by abolishing all
legislation’s that discourage patronage in the capital market. The
government should deepen the market by active participation in the
market after about 16years of absence. The government should be
interested in developing the capital market by funding institutions that
regulate the market.
There is need for investor protection fund in the securities market,
for clients of market operators other than stockbrokers. Currently, if a
Fund Portfolio Manager, Trustee, Registrar, Issuing House etc goes
burst, the fidelity bond appears to be the only thing available for
distribution. The other alternative is for the individual client to seek
redress in the law court. The market authorities should come up with
additional safety value to guarantee an appreciable degree of protection
for investors who have deposits, placements or other assets with the
failed market operators.
The establishment of an overthecounter (OTC) stock exchange for
small enterprises will enhance the attractiveness of listing small and
mediumsized private firms in the Stock Exchange for raising longterm
capital.
The government should adopt a prudent fiscal and monetary policy
that is essential to maintaining internal and external stable macro
economic environment in order to minimise the negative consequences
of foreign stocks on the domestic economy and thereby prevent financial
outflows from the domestic capital market. The government must
continuously maintain, a monetary policy that controls inflation’s and
allows for a market determined interest rate. The government should
provide fiscal incentives in terms of tax exemptions for new private firms
that desire to be listed on the Stock Exchange. The government should
involve capital market operators in the ongoing privatisation
programme so as to sensitise the populace to understand the purpose
and benefits of the privatisation programme so as to encourage
patronage.
There is also need to improve SEC financial capabilities and the
empowerment of the Commission in order to function effectively.
Therefore, SEC should be wholly/fully funded by the Federal
Government. Ndanusa (2001) posited that a regulator whose main
financial support is from the market is weak, unsafe and cannot enforce
the law. This need is now urgent.
Without mincing words, if the above recommendations are adhered to
capital market will continue to be an engine of growth to Nigerian
economy.
CONTRIBUTIONS TO KNOWLEDGE
This project empirically evaluated the relationship between capital
market development and longrun growth. The data suggest that capital
market development is positively associated with economic growth.
This researcher believes, however, that with the study, useful
contributions have been made to knowledge in the following areas:
1. Nigerian publics in general.
2. Capital market regulators and operators.
3. Investors
4. Government policy making
Nigerian Publics in General
A capital marketliterate society is no doubt an asset to its growth
and development. In Nigeria, the public is largely uneducated about the
essence, working and benefits of the capital market. This project
therefore contribute to the fact that it is imperative for Securities and
Exchange Commission, the Nigerian Stock Exchange and market
operators to vigorously embark on programmes aimed at improving
knowledge about the capital market. The most widely used method for
public education has been the creation of public fora such as seminars,
conferences; workshops, essay writing on capital market etc. From
observation most participants at seminars have largely been market
operators, government functionaries, the academic community,
professional bodies and staff of quoted companies, while these meetings
have not been too successful in attracting grassroots participation.
This project therefore contributes to knowledge in reawakening the
consciousness of the Nigerian publics the need to participate by
investing in the Nigerian capital market.
Capital Market Regulators and Operators
This study have been very valuable to market regulators and
operators in discussing issues aimed at improving the professional
expertise of regulators and operators, the operational efficiency of the
market, listing on the Stock Exchange; introduction of new financial
instruments, investor protection for sustaining investor confidence
which does not stop at setting and enforcing the rules for fair trading
but includes a framework for monitoring the market to see that false
markets are not created. Market operators now know the importance of
running their businesses transparently and efficiently in accordance to
stipulated guidelines. Market operators have also been intimated with
the need to maintain a better relationship with operators in the
international arena with a view to facilitating the flow of international
investment capital to Nigeria. This study have enumerated problems
which characterised the Nigerian capital markets and what can be done
to solve them with a view to empowering SEC and NSE to foster capital
market development and invariably contribute to the country’s economic
growth.
Market regulators and operators should strive to generate
awareness among market users in the concept of cost of capital. The
researcher is of the opinion that capital market regulators and operators
should take cognisance of upgrading the Automated Trading System
(ATS) and the Central Securities Clearing System (CSCS) in order to
make trading on the Nigerian Stock Exchange efficient.
Investor
The study reaffirms that investors need to broaden their
ownership structure and move from the family business structure to
the universally accepted model operated by quoted companies.
Government Policy Making
The researcher is of the opinion that government should make the
environment conducive for business. This includes making the
monetary policies are rational, stable and predictable. Government’s
policies should ensure that equities have attractive yields when
compared to another domestic and foreign investment alternative.
Government would also help top build more confidence in the capital
market by borrowing from the markets to fund projects. The existence of
a standing capital market committee at the House of representative
should be made functional so as to contribute positively to the
development of the Nigerian Capital Market.
This study has contributed greatly to the under standing of social
issues and policy implication of poverty alleviation following capital
market reform in Nigeria. This study would also like to point out that
equity and poverty alleviation issues are policy concerns which should
be incorporated in the strategy for reform and capital market
development.
A more vibrant capital market has a wellestablished relationship
with the economic growth of a nation. Both the government and the
private sector have a lot of work to do to develop the capital market and
attract more companies and individuals to trade in the capital market;
which will in return impact positively on the economy.
5.4 LIMITATIONS OF THE STUDY
There are certain limitations that tend to affect the overall success
of researches worldwide. This was no exception. The limitations include
the following:
Fear of espionage: Reluctant attitude on the part of SEC and NSE to
release relevant data as they considered all information or data as “top
secret” or “strictly confidential”. Due to the prevailing economic
situation there is a time and financial constraint.
However, in spite of the constraints, the study is valid as sufficient
data was obtained through secondary sources thus paving way for a
meaningful research.
5.5 SUGGESTIONS FOR FUTURE STUDY
Much work remains to better understand the relationship between
capital market development and economic growth. Further research
must be conducted to identify the policies that will ease sound capital
market development with a view to identify the causal interactions
between capital market development and economic growth.
Research work could also be done on the Effect of Market Legislation
and Pension Reform on the Growth and Development of the Nigerian
Capital Market.
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Coefficientsa
unstandardized coefficients
Standardized Coefficients
Model B Std. Error
Beta t Sig
1. (Constant) X1 market capitalization X2 value of transaction X3 volume of transaction X4 number of securities X5 all share index
2631.5842.15278.6461.47959.9975.672
2736.1951.24722.2401.214108.3571.114
.865.729.270.1712.601
.9621.7263.5361.218.5545.094
.512
.334
.174
.438
.678
.123
a. Dependent Variable: Y gdp
Residuals Statisticsa
Minimum Maximum Mean Std. Deviation
N
Predicted Value Residual Std. Predicted ValueStd. Residual
2204.79791067.10.961.541
56698.271198.38171.623.608
22472.471.26E11.000.000
21082.6959804.94861.000.408
7777
a. Dependent Variable: Y gdp
Variables Entered / Removedb
Model Variables Entered Variables Removed
Method
1. X5 All share index, X2 vale of transaction, X3 volume of transaction, X4 number securities, X1 market
Enter
capitalization a. All requested variables entered.b. Dependent Variable: Y gdp
Model Summaryb
Model R R. square
Adjusted R. square
Std. Error of the Estimate
DurbinWatson
1 .999a .999 .991 1971.7133
3.002
a. Predictors: (constant), X5 All share index, X2 value of
transaction, X3 volume of transaction, X4 number of securities,
X1 market capitalization
b. Dependent Variable: Y gdp
ANOVAb
Model Sum of Squares
df Means Square
f Sig.
1. Regression Residual Total
2.67E+0938876532.67E+09
516
533376066.03887653.274
137.197 .065a
a. Predictors: (constant), X5 all share index, X2 value of transaction,
X3 volume of transaction, X4 number of securities, X1 market
capitalization
b. Dependent Variable: Y gdp
Mode Summaryb Model R R.
squareAdjusted R. square
Std. Error of the Estimate
DurbinWatson
1 .982a .964 .954 7228.7043
.984
a. Predictors: (constant), X4 number of securities, X1 market
capitalization, X2 value of transaction, X3 volume of transaction,
b. Dependent Variable: Y gdp
ANOVAb
Model Sum of Squares
df Means Square
f Sig.
1. Regression Residual Total
2.08E+107.84E+082.16E+10
41519
519380615052254166.04
99.395 .000a
c. Predictors: (Constant), X4 number of securities, X1 market
capitalization, X2 value of transaction, X3 volume of transaction,
d. Dependent Variable: Y gdp
Coefficientsa
unstandardized coefficients
Standardized Coefficients
Model B Std. Error
Beta t Sig
1. (Constant) X1 market capitalization X2 value of transaction X3 volume of transaction X4 number of securities
8112.2547.35E0310.463.560393.254
4922.579.00612.282.25656.005
.118.081.266.882
1.6481.278.8522.1897.189
.120
.221
.408
.045
.000
a. Dependent Variable: Y gdp
Residuals Statisticsa
Minimum Maximum Mean Std. Deviation
N
Predicted Value Residual
4401.7512211.7
107300.89225.630
61924.336.55E12
33067.0965
2020
Std. Predicted ValueStd. Residual
2.0061.689
91.3721.276
.000
.0006422.87231.000.889
2020
a. Dependent Variable: Y gdp
Regression
Coefficientsa
unstandardized coefficients
Standardized Coefficients
Model B Std. Error
Beta t Sig
1. (Constant) X1 market capitalization X2 value of transaction X3 volume of transaction
7427.6352.56E0254.7032.156
3280.969.00916.891.268
.306.363.876
2.2642.7693.2398.034
.032
.010
.003
.000
a. Dependent Variable: Y gdp
Residuals Statisticsa
Minimum Maximum Mean Std. Deviation
N
Predicted Value Residual Std. Predicted ValueStd. Residual
8228.071323039.0.9171.805
120470.128190.372.1932.209
41328.842.50E12.000.000
36095.666812130.49301.000.950
32323232
a. Dependent Variable: Y gdp
Regression
Variables Entered/Removedb
Model Variables Entered Variables Method
Removed1. X4 number of
securities, X1 market capitalization, X2 value of transaction, X3 volume of transaction a
Enter
a. All requested variables enteredb. Dependent variable: Y gdp
Residuals Statisticsa
Minimum Maximum Mean Std. Deviation
N
Predicted Value Residual Std. Predicted ValueStd. Residual
14593.4437487.4.8611.644
138817.451603.423.1402.263
41328.843.18E12.000.000
31043.688122053.01461.000.967
32323232
a. Dependent Variable: Y gdp
RegressionVariables Entered/Removedb
Model Variables Entered Variables Removed
Method
1. X3 volume of transaction, X1 market capitalization, X2 value of transaction a
Enter
a. All requested variables enteredb. Dependent variable: Y gdp
Mode Summaryb Model R R.
squareAdjusted R. square
Std. Error of the Estimate
DurbinWatson
1 .948a .899 .888 12763.8086
1.928
a. Predictors: (constant), X3 volume of transaction, X1 market
capitalization, X2 value of transaction.
b. Dependent Variable: Y gdp
ANOVAb
Model Sum of Squares
df Means Square
f Sig.
1. Regression Residual Total
4.04E+104.56E+094.50E+10
32831
1.346E+10162914810.5
82.640 .000a
a. Predictors: (Constant), X3 volume of transaction, X1 market capitalization, X2 value of transaction.
b. Dependent variable: Y gdp
RegressionVariables Entered/Removedb
Model Variables Entered Variables Removed
Method
1. X2 value of transaction, X1 market capitalization Enter
c. All requested variables enteredd. Dependent variable: Y gdp
Mode Summaryb Model R R.
squareAdjusted R. square
Std. Error of the Estimate
DurbinWatson
1 .815a .665 .641 22800.7857
.875
a. Predictors: (Constant), X2 value of transaction, X1 market capitalization.
b. Dependent Variable: Y gdp
ANOVAb
Model Sum of Squares
df Means Square
f Sig.
1. Regression Residual Total
2.99E+101.51E+104.50E+10
22931
1.494E+10519875826.8
82.640 .000a
a. Predictors: (Constant), X2 value of transaction, X1 market capitalization
b. Dependent variable: Y gdp
Coefficientsa
unstandardized coefficients
Standardized Coefficients
Model B Std. Error
Beta t Sig
1. (Constant) X1 market capitalization X2 value of transaction
14421.6445.143E03115.158
5650.909.01527.014
.61
.765
2.552.3424.263
.016
.735
.000
a. Dependent Variable: Y gdp
RegressionVariables Entered/Removedb
Model Variables Entered Variables Removed
Method
1. X1 market capitalization
Enter
a. All requested variables enteredb. Dependent variable: Y gdp
Mode Summaryb
Model R R. square
Adjusted R. square
Std. Error of the Estimate
DurbinWatson
1 .674a .454 .436 28591.2698
.136
a. Predictors: (Constant), X1 market capitalization b. Dependent Variable: Y gdp
ANOVAb
Model Sum of Squares
df Means Square
f Sig.
1. Regression Residual Total
2.04E+102.45E+104.50E+10
23031
2.043E+10817460711.1
24.989 .000a
a. Predictors: (Constant), X1 market capitalization b. Dependent variable: Y gdp
Coefficientsa
unstandardized coefficients
Standardized Coefficients
Model B Std. Error
Beta t Sig
1. (Constant) X1 market capitalization
29124.8385.641E02
5612.998.011
.6745.1894.999
.000
.000
a. Dependent Variable: Y gdp
Residuals Statisticsa
Minimum Maximum Mean Std. Deviation
N
Predicted Value Residual Std. Predicted
29127.1346929.7.475
148259.739999.504.166
41328.841.364E12
25670.119028126.34
323232