STOCK EXCHANGE PRICES AND ECONOMIC PERFORMANCE IN NIGERIA FROM 2007 TO 2017
- Background to the Study
Stock exchange Market is a financial market involving institutions that deal with securities with a life of more than one year. The Nigerian Stock exchange is a major player in the market for long-term funds. The instruments or securities traded in the stock exchange market are known as stock exchange market instruments. However, the stock exchange market has both securities based segment (i.e. the stock exchange) and non-Securities based segment (market for long term loans). Stock exchange market instruments can be categorized into 3 major groups of securities: preference shares, ordinary shares and debt instruments. Some of the other principal and active market operators in the Nigerian Stock Market include Stockbrokers, Investment Advisers, Issuing houses, Registrars, Fund Managers, Financial Advisers et cetera. The Nigerian Stock exchange is the center point of the Nigerian capital Market. It provides a mechanism to mobilize private and public savings as well as making such funds available for productive purposes. The Nigerian Stock Exchange also assists in the allocation of the nation’s stock exchange resources amongst numerous competitive alternatives. The stock exchange can also be a mechanism, which can measure and detect the symptoms of an impending economic boom or decline long before thepredicted prosperity or decline actually occurs provided the market is either in the semi-strong or strong form of efficiency level (Obudu; Konwe; Nwabenu; Omokri; Chijioke,2016).
The Nigerian stock market was established in 1960 as the Lagos Stock Exchange. It became the Nigerian Stock Exchange (NSE) in 1977 with branches established in different parts of the country. At the end of 1999, there were six branches: Kaduna, Port Harcourt, Kano, Onitsha, Ibadan and Lagos, which also serves as the head office of the exchange. Each branch has its own trading floor. The stock exchange creates two markets where companies can raise capital. This is often referred to as the primary market. Where shares are issued to the public for the first time and shareholders can trade in shares of listed companies—this is referred to as the secondary market. In this market, shareholders buy and sell existing shares (Erasmus,2016).
The NSE has witnessed tremendous evolution since its establishment in 1960. These developments can be seen in the increasing number of capital market instruments traded in the exchange, the increase in market operators, and the tremendous increase in the size of market capitalization. Some of the major factors responsible for this development, among others are: firstly, the indigenisation of the credit base objective. This was responsible for the huge investments in the second and third development loan stock issues in 1961 and 1962. Secondly, the Income Tax Management Act of 1961. Under this act, existing pension and provident funds in the country were legally required to invest at least one-third of their funds in Nigerian Government stocks, with the potential penalty of forfeiting valuable tax concession. Thirdly, the National Provident Funds Act of 1961 required pension and provident funds established after 1961 to invest at least half of their funds in stocks. Furthermore, the Insurance and Miscellaneous Provisions Act of 1964 required that at least 25 percent of all local investment of these insurance companies must be in government securities, as the Act required the insurance companies operating in Nigeria to invest locally in at least 40 percent of their premium on locally insured risks in any financial year. Finally, the Bank of Industry (formal Nigerian Industrial Development Bank) also exerts tremendous impact on the development of the stock market in Nigeria. This it has being doing by encouraging promising enterprises to incorporate as limited liability companies and then offer to take up their shares after incorporation, and finally encouraging such companies to apply at the appropriate time for stock exchange quotation (Okonkwo et al., 2014; Nigerian Stock Exchange, 2016).
Although interest in identifying a formal link between financial system and economic growth is fundamental, the basic intuition behind this relation is relatively easy to surmise. This is because of the fact that the main goal of the capital market is the channeling of funds from the surplus sector unit to the deficit sector unit of the economy. It plays a major task in human capital investments which are essential elements of economic growth and development. From this point of view, one should expect that as the capital market develops and deepens, then efficient allocation of the financial resources for the investment is facilitated and thus the frontier of production possibilities is increased (Adam &Sanni, 2005).
Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments. Financial markets play an important role in the mobilization of financial resources for long term investment through financial intermediation. The financial market, which comprises the capital and money markets as well as other submarkets, plays crucial roles in the functioning of any modern economy. However, for the purpose of this research work emphasis will be on the capital market. The capital market is believed to be an important sector of every economy whether it is developed or developing. This is because of the fact that the capital market performs a vital role in the growth of the economy by providing the avenue through which foreign investors make investment in the country which in turn may boost the growth of the economy in terms of foreign Direct Investment (Daniel, 2012).
1.2 Statement of the problem
Nigerian stock market has undergone a series of reforms all with the hope of creating a stable economic growth and development. The most recent reform was carried out in order to provide opportunities for greater fund mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal. It is expected as a result of the reform the market can provides variety of agents to pool, price and exchange risk(abdul,2014).
In spite of these vital roles that the reform is expected to play, there is however a great concern on the performance of the Nigerian stock exchange market in relation to the economic growth and development which when viewed from the nature of activities taking place in the market appeared superficial. This may probably be attributed to lack of providing enabling framework that sustained confidence and investors’ protection and also thorough evaluation of factors that are of significance relevance in determining capital market performance.
Although from economic perspective distinction exists between economic growth and development, most of the studies conducted in the area under study fail to take into consideration the difference and also the interrelationship between the two variables. This therefore triggers the need to investigate the situation bearing in mind the distinction and also appropriateness of the methodology under study. To the best of our knowledge, studies conducted in the area show mixed conflicting results and this could probably be attributed to failure to adopt appropriate methodology. Another issue of concern is most of the studies that evaluate stock market development and economic development but the present study which lacks literature review, will evaluate the impact of stock market price on economic performance from year 1983-2016.
1.3 Research Questions
Based on the broad statement of the problem the following research questions were raised:
- To what extent does market capitalization impact on gross domestic product?
- How does total new issues affect gross domestic product in Nigeria?
iii. To what extent does the volume of transaction in the capital market contribute to the Gross Domestic Product in Nigeria?
- To what extent does total listed equity in the capital market contribute to the Gross Domestic Product in Nigeria?
1.4 Objectives of the study
The main objective of the study is to examine the impact of stock market price on economic growth in Nigeria. However, the specific objectives are to:
- Determine the impact of market capitalization on the Gross Domestic Product (GDP).
- Assess the effect of total new issues on the gross domestic product.
iii. Identify the contribution of the volume of transaction to the gross domestic product in Nigeria.
- Examine the impact of total listed equities stocks on the gross domestic product in Nigeria.
1.5 Hypothesis of the study
In line with the objectives of the study the following hypotheses have been formulated in null form:
H01: Market capitalization has no significant impact on Nigeria’s gross domestic product.
H02: Total new issues have no significant effect on Nigeria’s gross domestic product.
H03: Volume of transaction has not significantly affected Nigeria’s gross domestic product.
H04: Total listed equities have no significant impact on Nigeria’s gross domestic product.
1.6 Significance of the study
It is a noted fact that for any meaningful economic transformation of a country to take place, the stock market must be effectively active. It has also been an acknowledged fact that the economic strength of any nation is measured 9 according to how actively and effectively the capital market is performing (Adamu, 2008).
The study will be of immense significance to regulatory authorities such as the CBN, NSE and SEC in coming up with sound financial policies and reforms that will boost the performance of the capital market. This would strengthen public companies by ensuring that corporate governance practices in Nigerian public companies are aligned with international best practices through improved financial disclosure of information and adoption of International Financial Report Standards. Finally, future studies may want to share this experience by extrapolating some of the data as well as the statistical inferences that this study has come up with.
1.7 Scope of the study
The Nigerian economy is a large component with a lot of diverse and sometimes complex parts. In this regard the study looks at a particular part of the economy by focusing particularly on the financial sector. Even then, the study does not cover all the parts of the financial sector, but focuses only on the stock market prices and its activities as such its impact on Nigerian economic growth. This is informed by the importance of the stock market to the economic development of the country because it provides long term funds needed for investment for the growth of the economy. The choice of the period of study, 1983-2017 is predicted on the reasoning that, the market has experienced remarkable developmental changes as well as improvement in the policy framework of the market. This is in terms of its operational activities, increase in the number of quoted companies and securities, as well as market capitalization. Although, new issues and volume of transactions have all recorded significant increase during the period of study but there have been records of downturn in some years as a result of the global financial crisis.
1.8 Definition of Key Terms
Stock Market Price; The market price of a stock is the price that it sells for on the open market at a given point in time. The market price will usually fluctuate throughout the trading day as investors buy and sell stocks.
Economic Performance; The performance of an economy is usually assessed in terms of the achievement of economicobjectives. These objectives can be long term, such as sustainable growth and development, or short term, such as the stabilisation of the economy in response to sudden and unpredictable events, calledeconomic shocks.