THE IMPACT OF CAPITAL MARKET FINANCING ON THE ECONOMIC DEVELOPMENT OF NIGERIA
This research work examines the impact of Capital Market Financing on Economic Development in Nigerian. It also examined theories that have postulated the key role of capital accumulation in the process the economic development of nation. Although, capital can be mobilized from different sources, both theoretical and empirical analysis have different long term sources of finances are more veritable from productive capital investment. Consequently, the capital market plays a key role in this mediation process.
Emphases have been placed on indicators of stock market size, liquidity and growth over a period of twenty tears; together with their combined effects on the rate of economic growth and development within the Nigerian context. Empirical data were collected and analyzed. The result of the analysis showed a positive relationship between the independence variables measures and their impacts on economic growth in Nigeria as measured by the gross domestic product (GDP).
However, linking the paucity in capital market instruments as well as expansion of capital market finances to increase in real productive investment and development it was discovered very little is achieved in is respect.
TABLE OF CONTENT
1.2 Statement of Production
1.3 Objective of the Study
1.4 Research Questions
1.5 Research Hypotheses
1.6 Research Methodology
1.7 Method of Data Collection
1.8 Method of Data Analysis
1.9 Significance of Study
1.10 The Scope and Limitation of Study
1.11 Definition of Terms
CHAPTER TWO; LITERATURE REVIEW
2.2 Concept Capital Market
2.3 Role of Capital market
2.4 Efficient Market Hypotheses
2.5 Capital market Development and Successful Operation
2.7 Evolution of the Nigerian Capital Market
2.8 Structure of the Nigeria Capital Market
2.9 Instrument of Capital Market in Nigeria
2.10 Contribution of Stock Exchange of Formation
2.11 Problems of the Nigeria Capital Market
CHAPTER THREE: RESEARCH METHODOLOGY
3.2 Research Methodology
3.3 Method of Data Collection
3.4 Method of Data Analysis
3.5 Re-Statement of Hypothesis
3.6 Model Specification
3.7 A Priori Expectation
3.8 Specification of Data
DATA ANALYSIS AND INTERPRETATION OF RESULT
4.2 Empirical Result
SUMMARY, CONCLUSION AND RECOMMENDATION
5.1 Summary of findings
Appendix I: Regression Analysis 1
Appendix II: Regression Analysis II
Appendix III: Regression Analysis III
Appendix IV: Regression Analysis IV
Appendix V: Bibliography
1.1 BACKGROUND OF THE STUDY
Economic development form of the core macroeconomic objectives which every nation strives to achieve. It is a state of sustained increase in the real per capital income, which is not accompanied by widening inequality and without increasing the number of people living below the poverty line (Jhingan, 1981). Thirlwall (1983) stressed that development holds when there is an improvement in basic needs and economic progress has contributed to a greater sense of self esteem for the countries and individuals within it and material advancement has expanded the range of choice for individuals.
In a nutshell, economic development is conceptualized as economic growth, accompanied by desirable social change or equitable distribution of income and socially optimal resources. 'Utilization' (Fashola 1998).
From the foregoing, it become evidence that economic development inevitably involves economic (growth). The growth process typically involves instituting long term investment projects that are capable of stimulating the productive capacity of the economy.
In the third world countries policy makers a d the international community have always expressed great concern about the level of under development. The need for a reduction in the level of poverty, increase industrial capacity utilization, reduce the rate of the unemployment, price stability among others are some of the consideration of those in government.
The achievement of the laudable objectives of economic development is hanged on the availability old the necessary infrastructures, which facilitates the mobilization of development input and all these are long term in nature. It then follows that the success of any economic development effort will be dependent on the availability of long term financing, which would support long term investment.
The link between the capital market and economic development is that the capital market provides this long term financing arrangements.
The Collins dictionary of economics defined capital market as a “market for long term company loan capital, share capita and government bonds. In the same vein, it has been described as the "complex of institutions and mechanism through which intermediate term funds and long term funds are pooled and made available and instruments already outstanding are transferred". Kadiri (1992) also defined capital market as a market where scarce long term funds are mobilized and efficiently allocated to achieve economic growth and development. Furthermore, it has been described as an exchange mechanism that brings together sellers and buyers of a product or service, factors of production of financial securities".
The capital market principally, act as financial intermediary that help to mobilize funds from the surplus sector to the deficit sector of an economy in order to foster the ace of economic development.
The cores of the capital market are the banks d the stock exchange market. Both of them differs in the type of services that they render; but theories and empirical investigations have been advanced at they contribute significantly to the economic development of any nation.
For instance, in a study conduct by Levine an Zervous (1996) using data of forty nine (49) countries from 1976 to 1993, they discovered that of stock market liquidity, size, volatility and integration with international capital accumulation, productivity improvements and private savings.
The existing literatures clearly show that dev loped economies had explored the two channels through which resources mobilization affects economic growth and development - money and capital market (Samuel, 1996; Demigue - Kunt and Levine, 1996). This is however, not the case in developing economies where emphasis is money market with little consideration for capital market (Nyong, 1997). Since the introduction of Structural Adjustment Programme (SAP) in Nigeria, the country's stock market has grown very significantly (Alile, 1996; Soyede, 1990). This is as a result of deregulation of the financial sector and the privatization exercise which exposed investors and companies to the significance of the Stock market. Equity finance became one of the cheapest and flexible source of finance from the capital market and remains a critical element in the sustainable development of the economy (Okereke - Onyiuke, 2000).
The link between stock market performance and economic growth has generated strong controversies among analyst based on their study of emerging market (Samuel, 1996 Obadan, 199 ). According to Nyong (1997), the financial structure of a firm that is the mix of debt and equity financing changes as economics develop. The tilt is however more towards equality financing through the stock market. As economic develop, more funds are need to meet the expansion. The stock market serves as a veritable tool in the mobilization and allocation of saving among competing users which are critical to the growth and efficiency of the economy (Alile, 1984).
Though the stock market is growing it is however characterized by complexities. The complexities arise from the trend in globalization and increased variety of new instruments being traded; equity options, derivatives of various from, index futures etc, However, the central objective of the stock market worldwide remains the maintenance of efficient market with attendant benefit of economic growth (Alile, 1997).
Consequently upon the above theoretical assertions, the central thrust of this research project was to investigate empirically the impacts or the extent to which the Nigerian Capital Market (particularly the stock exchange market) in term of size, liquidity and institutional framework have contributed to economic growth and development in Nigeria.
1.2 STATEMENT OF THE PROBLEM
The global economy in recent times has experienced a great depression and series of financial crises. This is followed by a drastic fall in the prices of global financial instrument like shares, commodities, options forwards futures among others. All these have considerable impacts on the global financial market in terms of their ability to mobilize and efficiently allocate long term funds needed to foster the ace of economic growth and development. The reasons adduced for such global failure of stock market was owing to the declining consumer spending and weak corporate performance. In United State, for instance, subprime mortgage lending crises sparked off credit squeezed and in teased cost borrowing in many developed economies.
Since Nigeria is a part of the global economy, it also felt an hitch from the global crises. This is evidenced by the de lining prices of securities in the stock market since the beginning of 2008 However, policy makers have claimed that all economic indices indicate that Nigeria can withstand the shock of global financial crises (Soludo 2008). They argued that Nigerian has witnessed a growth rate in GDP from 5.6% in 2006 to 6.3% in 2007 and 8.5% by second quarters of 2008, an increase in external reserve from US$42.3B in 2006 to US$50.75B in 2007 and US$63B by October 2008. Apart from this, inflation rate remained within the single digit target while the CBN was able to defend the Naira exchange rate which appreciated by 8.03% to close at NI16.8/US$ in December 2007.
No doubt, all these policy measures ha a significant impact on the performance of the stock market. For instance, the total new issues increased to stand at nl.79B in 2007 as against N5.30M in 2006 nominal value terms. The market capitalization also increased from N4.2 trillion in 2006 to NI0.18 trillion in 2007. The volume and value of trade also showed a remarkable II improvement between 2006 and 2007.
Nonetheless the growth of the capital market, the real sector have not really benefited immensely from the liquidity created by the stock market. For instance, the Manufacturer Association of Nigeria (MAN) reported a drop in the manufacturing capacity utilization from 44.06% in 2006 to domestic product (GDP), which measures the impact of stock market size on economic growth, revealed that the proportionate growth in GDP is less than that of the stock market. Apart from is, the stringent conditions put in place by the regulators of the market also make it difficult for small and medium firm to gain access to the stock exchange market. In 2007, it was recorded that the banking and insurance sub-sectors accounted for nineteen of the top twenty companies in terms of trade volume as a result of the fallout of the recapitalization programme that took place in 2005.
Consequently, the two sub-sector dominated the Mock market at the expense of others subsector; thus reducing the availability of fund productive sector of the economy.
The emphasis of the market player have been that of value creation for the shareholders in the form of dividend and capital gain rather focusing on real economic growth by judiciously all eating fund to the productive sectors of the economy.
Although economic literatures have pr dieted a positive correlation between the stock market and economic growth, we cannot affirm whether this is true in the case Nigeria in view of the above factors.
It is on this basis that the researcher has intended to explore empirically the relationship between stock market (in terms of financing, liquidity, size, and volatility) and economic growth and development in Nigeria.
1.3 OBJECTIVE OF THE STUDY
The key purpose of this research work as to empirically the impact or extent to which capital market finance, particularly the stock exchange market have contributed to economic development in Nigeria.
Based on this, the general objectives of the study are outlined below:
1. To evaluate the role capital economic growth and development of Nigeria.
2. To identify the factors mitigating the development of capital market in Nigeria.
3. To evaluate the impact of market capitalization ratio on gross domestic product and capital formation in Nigeria.
4. To examine the effect of stock market liquidity on the real output in Nigeria.
1.4 RESEARCH QUESTIONS
i. What are the roles of the Capital Market towards economic development?
ii. What are the major problems confronting the growth of capital market in Nigeria?
iii. Does the stock market capitalization growth and development?
iv. Does the market liquidity have any significant relationship with gross domestic product, capital accumulation and private saving in Nigeria?
1.5 RESEARCH HYPOTHESES
H0: There is no significant relationship between market Capitalization ratio and gross domestic product in Nigeria
H1: There is a significant relationship between market Capitalization ratio and gross domestic product in Nigeria
H0: There is no significant relationship between stock market turnover ratio and gross domestic product in Nigeria
H1: There is a significant relationship between stock market turnover ratio and gross domestic product in Nigeria
H0: There is no significant relationship between the value traded ratio and gross domestic product in Nigeria
H1: There is a significant relationship been the value traded ratio and gross domestic product in Nigeria.
H0: There is no significant relationship between new issues of equity and debt capital on gross domestic prod t in Nigeria
HI: There is a significant relationship between new issues of equity and capital on gross domestic product in Nigeria.
1.6 RESEARCH METHODOLOGY
As examined in the details later, this study explored a time series data for a period of twenty years covering 1980 to 2009 for all the relevant variables being studied. The least square method of regression analysis using SPSS was examined the extent to which the explanatory variables affect economic growth and development in Nigeria.
1.7 METHOD OF DATA COLLECTION
Secondary sources of data generation is employed in other to obtain the variables for the purpose of answering the research questions, testing the hypotheses and achieving the research objectives, the researcher explored secondary sources of data like; textbook , magazines, newspapers, CBN research library, National Bureau of Statistics, Achieves among others.
1.8 METHOD OF DATA ANALYSIS
The use of economic analysis is employed to text for the relationship between dependent and independent variables. The least square method of regression analysis using SPSS was used to examine the extent to which the independent variable affects the economy.
1.9 SIGNIFICANCE OF STUDY
The standard of living of every citizen is important for the socio-economic development of that nation. This study hopes to improve the effectiveness of capital market financing on economic development in Nigeria. Relevant data on this study can be adopted by policy planners, government offices and the masses can as well adopt relevant data on this study. The study is interested in helping to reposition the role of capital market finance towards nation building particularly as Nigeria intends to be amongst the 20th nation by the year 2020.
The result of the study reviewed what could be done to promote a well functioning capital market that can effectively mobilize the needed fund for the socio-economic development of Nigeria.
Apart from contributing hew knowledge to academic discipline; this study also serves as a good secondary data for other researchers who might be interested in conducting a future similar research in the area of the impacts of capital market finance on economic development in Nigeria.
1.10 THE SCOPE AND LIMITATION OF STUDY
The capital market is a bread concept; consequently, it is made up of so many participants, intermediaries and instruments. Examples of institutions within such market includes: banks, Stock exchange, Insurance companies, Pension fund Administrators, Mutual fund managers Units trust among others.
However, the entire research work has concentrated on the stock market because it is the hub of the capital market where cheap permanent source of capital like equity, shares are obtained little emphases was placed on banks source of finance like loan because the stock exchange market also provides similar financial instrument like bank loan. Such instrument includes: corporate debenture, loan stock and government development bonds. Also the research work only examined a time series data for a period of twenty years covering 1980 to 2009 for all relevant variables being studied.
Nevertheless, finding of the data considered the peculiar circumstances of the study area.
It would be fallacious to claim that the research was constrained free. The research project was limited due to several constraint; chief amongst which are:
i. Time Factor: The time duration was not enough to collect and collate more past studies on the topic for evaluation so as to give more information on the topic.
ii. Financial Constraint: The high cost of materials restrained the researcher from testing more models which will further enhanced the result to be derived from the study.
iii. Information: Another limitation faced by the researcher is the sensitivity of certain data required for the purpose of this research. As such, this led to the dearth of relevant statistical information.
1.11 DEFINITION OF TERMS
Active market: A loose term denoting a high liquidity in a stock market
Asset Allocation: The process of deciding how to apportion investment capital between the various asset classes bond, stock, property, cash etc.
Arbitrage: This is the simultaneous purchases I and sales of two different but closely related securities to take advantage of disparity in their prices; alternatively, it is the purchases and Bale of the same security in different market.
Bear market: A market in which seller out number buyer and where the trend of shared prices is consequently falling one.
Bull market: A market in which prices are raising and in which investors confidence in the continuation of rising is high.
Blue Ship: A company with large market capitalization stable earnings and consistent dividend record.
Bond: The generic name for trade-able loan securities issued by government and companies as a means of raising capital.
Business cycle: More or less regular fluctuation in aggregate economic activity between peaks and troughs typically over a five to ten years period.
Capitalization: (1) the injection of fund or capital into an economy.
(2) The process by which a company converts its cash reserve into new shares and issue them to equity shareholders on porata basis.
Capitalization ratio: Ratio of market capitalization to GDP. It is a measure of stock market size.
Debt instruments: A promise in writing to repay debt, eg Bond Bill, Commercial paper, bankers acceptances, notes etc.
Debt securities: A securities such as bond or notes with special interest rate representing a loan which is repayable as some future date.
Deals: The number of times a security is traded in a day.
Derivative: A collective term for securities whose price are based on the price of
another (underlying) investment.
Domestic market: The part of the country's market that trades the security of entities located within that nation.
Equity: The amount which a shareholder own in a publicly quoted company. Financial strength: A measure of a company's solvency, looking at the relationship between its asset and liabilities.
Financial instrument: A means of transferring fund from the surplus sector to the deficit sector of an economy.
Future contract: A legal agreement to make or take delivery of a specified instrument (such as share or foreign currency) or commodity (such as cotton or cocoa) at a fixed date at a price determined at a time of dealing.
Going public: The final act of listing a company's share on the stock exchange market.
Institutional investor: A financial institution which invest large amount in the stock, bond or other financial market eg. Pension funds administrators (PFA), insurance companies, mutual funds operators, market makers etc.
Intermediary: An agent, broker or financial institution who can give and act as a middle person between a company and a client conducting investment business.
Liquid market: A market in large quantities of shares are being bought and sold thereby making trading straight forward.
Market Capitalization: The market value of a quoted company which is calculated by multiplying its current share price by the number of share in issue.
Option: A contract that gives its holders the right but not obligation to buy or sell a fixed number of shares (or other instrument) at a fixed price on or before a given date.
Over the counter (OTC): A stock or shares that is not traded on a listed exchange, but which is traded between dealer by telephone or computer.
Primary market: A market in which new issue are traded in order words, the trading of shares directly between company and investors.
Secondary market: A trading of shares amongst investors which does not include the company itself.
Securities: A financial instrument such as shares or bonds.
Unit trust: Are collective fund which allow private investors to pool their money into single fund, thus spreading their risk, getting the benefit of professional fund management and reducing their dealing cost.
Ventures capital: Capital invested into small arid young companies in return for equity ownership.
Volatility: A measure of a security's prosperity to go up and down in price..