AN ASSESSMENT OF THE IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA.

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ABSTRACT

This study examines the impact of stock market development on economic growth in Nigeria using annual time series data covering the period between 1980 and 2019. The techniques employed are Augmented Dickey Fuller unit root test, Johansen Cointegration Analysis, Ordinary Least Square and Granger causality test. The unit root test results show that all variables are not stationary at levels but became stationary at first difference i.e. I(1) variables. The Cointegration test indicated the existence of long-run relationship between stock market development and economic growth. The ordinary least square results show that there is significant relationship between stock market development variables and economic growth in Nigeria. Specifically, there is positive and significant relationship between market capitalization and number of deals with economic growth while all share index and value of stocks traded have an inverse and significant relationship with economic growth. Market capitalization appears to be the major stock market indicator. The result of the Granger causality test result indicates the existence of unidirectional causal relationship between market capitalization and value of stock traded with economic growth and not vice-versa. The results further show a bi-directional causal relationship between the number of deals with economic growth and vice-versa. Based on these findings government should address the shortage of investment assets through effective policy measures that enhance the performance of stock market and to restore confidence of the investors.

Keywords: stock market development, economic growth, Co-integration, Ordinary Least Square, Granger causality.

TABLE OF CONTENTS

TITTLE PAGE………………………………………………………………………………………………. i

DECLARATION…………………………………………………………………………………………… ii

CERTIFICATION……………………………………………………………………………………….. iii

DEDICATION……………………………………………………………………………………………… iv

AKNOWLEDGEMENT……………………………………………………………………………….. v

ABSTRACT…………………………………………………………………………………………………. vi

TABLE OF CONTENTS…………………………………………………………………………….. vii

CHAPTER ONE: INTRODUCTION

  • Background of the Study…………………………………………………………………………. 1

CHAPTER TWO: LITERATURE REVIEW AND THEORETICAL FRAMEWORK

    1. The Stock Exchange…………………………………………………………………………………….. 8
    2. Economic Growth………………………………………………………………………………………… 9
    1. Cumulative Prospects Theory……………………………………………………………………… 11
    2. Endogenous Growth Theory……………………………………………………………………….. 11
    3. Absolute Income Hypothesis……………………………………………………………………….. 12

CHAPTER THREE: METHODOLOGY

    1. Methods ofData Collection…………………………………………………………………………. 17
    2. Method of Data Analysis andModel Specification…………………………………………. 17
      1. Regression Analysis………………………………………………………………………….. 19
      2. Unit Root Test…………………………………………………………………………………. 19
      3. Johansen Cointegration Test………………………………………………………………. 20
      4. Granger Casuality Test………………………………………………………………………. 20

CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS

  1. Unit Root Test24

CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATION

    1. Conclusion33
    2. Recommendations33

5.3 Suggestions for further Research……………………………………………………………. 34

REFERENCES……………………………………………………………………………………………. 35

APPENDIX…………………………………………………………………………………………………. 39

CONTACT INFORMATION

Muneerah Auwal

Email: Muneerahauwal@gmail.com

LIST OF TABLES

  • Result of the unit root test………………………………………………………………………….. 25
  • Co-integration test result……………………………………………………………………………. 25
    • Ordinary least square regression result…………………………………………………………. 26
    • Granger causality test result……………………………………………………………………….. 27

LIST OF FIGURES

Figure 2.2 Conceptual framework……………………………………………………………….. 8

Figure 4.1: Summary Statistics of the Variables (1980 – 2019)……………………….. 22

Figure Table 4.2. Result of the Unit Root Test……………………………………………… 25

CHAPTER ONE INTRODUCTION

Resources mobilization for national development has been the centre of focus for development economists. Consequently, the centrality of savings and investment in economic growth has been given significant attention in economic literature. Financial markets, especially stock market have developed substantial in developed and developing countries over the last two decades. As economies develop, more funds are required to meet the rapid expansion. Thus, stock market serves as a veritable tool in mobilizing and allocating savings among competing uses which are essential for the growth and efficiency of the economy (Alile 1984).

The financial market is a broad term that describes any platform where currencies, derivatives, securities, bonds, and shares are bought, sold or exchanged. A stable and efficient financial market is essential in every country because it aids economic growth and development in the country; it leads to an increase in the standard of living and wellbeing in an economy through the proper distribution and allocation of resources (Adenuga, 2010). All these are achieved by the financial market as it tends to facilitate lending, borrowing or investments by serving as a link between the savers and investors, with the interaction of these two parties, the total aggregate savings are channeled into profitable investment in an open market for the growth and development of the nation’s economy.

A capital market, which is part of the financial market, is broadly defined as an institution for raising medium and long-term finance (Olawoye, 2011). It also refers to a platform of specialized financial institutions, sequences of mechanisms, processes and infrastructure that facilitate the linkage between suppliers and users of medium to long-term capital for investment in the economy according to (Al-Faki, 2006). However, the capital market has both securities based segment (stock exchange) and non-securities based segment market (for long- term loans). The capital market segment is much wider and bigger than the Stock Exchange.

The Stock Exchange is just a key participating institution in the capital market albeit it is the most active of all the participants and it is the center point of the Nigerian Capital Market (Ndako, 2010).

However, this study focuses on the stock market. The Stock market, also known as the securities exchange is an important part of the financial market, it is any market where shares of quoted companies are bought, sold or exchanged at an agreed price governed by the forces of demand and supply (Adenuga, 2010). According to Oke (2012), stock market is financial intermediary that has the ability to associate shortage to the surplus sectors of economy and utilization and provision of investment between competitive uses which are critical to the development and effectiveness of the economy.

A stable and developed stock market is regarded to be of key importance in the continuous growth and development of an economy. In Nigeria for example, economic growth has been attributed by some researchers to be a result of accelerated growth in the Nigerian stock market over time (Araoye, Ajayi and Aruwaji, 2018). The Nigerian stock market has witnessed a significant growth from a market capitalization of about N6.6 billion in the year 1985 to an average of N13trillion by the year 2014 (Araoye, Ajayi and Aruwaji, 2018). The significant growth is believed to be as a result of inflows of foreign direct investment into the Nigerian stock market. The growth has greatly impacted the development of the stock market before the global recession of 2008 (Ojo, 2010).

In the 1960, the Nigerian Stock Exchange (NSE) was established. However, it was known as the Lagos Stock Exchange. The name was changed to Nigerian Stock Exchange in 1977 from the Lagos Stock Exchange. It listed 196 companies as at 31st May, 2018 with a total market capitalization of over 13 trillion. It is for this reason this research is conducted to study examines the impact of the Nigerian stock exchange market on economic growth in Nigeria using the period of 1981 to 2019.

Statement of the Problem

There has been a public outcry recently on the role of the Stock Exchange in the economic development and thus, the stock exchange has been the central of focus on economic policies owing to its perceived benefits it provides for the economy. However, there has been great concern from economic experts, investment analysis

that the growth of the Stock Exchange in Nigeria is still very small in relation to the size of the economy (Oguji and Kene, 2010). In 2008 the Stock Exchange witnessed a major blow in the capital market that resulted to loss of billions of Naira.

The debate on the exact role of the Stock Exchange on economic growth is ongoing and so far, a number of studies have shown conflicting results (Abbas, Pei, and Rui, 2016; Chinwuba, and Amos, 2011; Kolapo, and Adaramola, 2012; Oguji, and Kene, 2010).While some are of the opinion that a negative link exists between Stock Exchange and economic growth, others argue that there exists a positive link. In any case, Stock Exchange will contribute to economic growth in a sustained manner if the right political climate exists.

The issues of macroeconomic stability, sufficient education of the public on the benefits of Stock Exchange on the growth and development of a country’s economy, the necessity of minimizing sharp practices of Stock Exchange operators, are all relevant to the full realization of the benefits of the Stock Exchange in any given economy world over and it is against this background that this study seeks to examine the impact of Nigerian stock exchange on economic growth in Nigeria.

Research Questions

The followings questions will guide the study;

  1. Does stock market development have any impact on economic growth in Nigeria?
  2. Is there any causal relationship between stock market development and economic growth in Nigeria?

Objectives of the Study

The broad objective of the study is to examine the impact of stock market development on economic growth in Nigeria. To achieve that, the following specific objectives will be pursued:

  1. Examine the impact stock market development and economic growth in Nigeria.
  2. Examine the causal relationship between stock market development and economic growth in Nigeria.

Statement of Hypotheses

The following key research hypotheses would be addressed in the course of this study: H0: Stock market development has no impact on economic growth in Nigeria.

H0: There is no causal relationship between stock market development and the economic growth in Nigeria.

Significance of The Study

This study sheds light on stock market development and economic growth in Nigeria. Therefore, the findings of the study will be significant to companies that are quoted and yet to be quoted in the Nigerian Stock Exchange, investors, investment analysts and policy makers. The study will unravel some of the facts they need to know about stock market and the economic growth in Nigeria that will help them in their decisions to invest or not to invest in the stock exchange market.

For the policy makers, the findings from this study will assist them in formulating better policies that would boost the Nigerian Stock Exchange thereby attracting more investors to invest massively and companies to be listed.

Finally, the study has added to the body of empirical knowledge and hoped to serve as reference material to other researchers, scholars and writers who would want to carry out a similar study of this nature.

Scope and Limitations of the Study

This study is limited in scope to the impact of stock market development and economic growth in Nigeria. It covered the period of 1981 to 2019. Furthermore, the study examined the causal relationship between stock market and economic growth in Nigeria.

In the course of the work, the researcher had to contend with some problems militating against the study.

Time Constraint: Time is a scarce resource, one of the major factors necessary for any study or research work is time, however, this research was conducted over a short period of time.

The researcher had not only to go to relevant organizations for information that aided the study, write the project paper, but also had to attend her normal lectures in school, hence, the time was limited.

Definitions of Terms

The Nigeria Stock Exchange: The Stock Exchange, also known as the securities exchange is an important part of the financial market, it is any market where shares of quoted companies are bought, sold or exchanged at an agreed price governed by the forces of demand and supply.

The Capital Market: The capital market is a financial market that is broadly defined as an institution where medium and long-term finance can be raised.

Stocks: Stocks are share of quoted companies’ that are traded on the Nigerian Stock Exchange.

Inflation: it is the general rise in price levels in an economy. It is calculated using indexes like consumer price index and producer price index.

Market capitalization: it is the total value of tradable shares of public companies

All shares index: This is a total market broad base index, reflecting a total portrait of the behaviors of the common shares quoted on the Nigerian Stock Exchange. ASI is calculated on a daily basis, showing how the prices have moved.

Economy Growth: Economic growth is the positive trend in the nation’s total real output or GDP over the long- term. It is the term used to mean per capita increase in productive ability. This is the kind of growth, which can provide an increasing standard of living for the people.

Organization of The Study

This research project is divided into 5 chapters. Chapter one offers a general introduction of the study, it captures the background of the study, statement of the problem, objectives of the study, research questions, statement of hypothesis, significance of the study, scope and limitations of the study, definition of terms and the organizational of the study. Chapter two captures the review of the literature and theoretical framework. Chapter three provides the research methodology adopted in the study. Chapter four provides the data analysis while Chapter five conclude the study, and it sets out the summary of the findings, conclusion and recommendations.