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THE ROLE OF STOCK MARKET IN THE GROWTH OF THE NIGERIAN ECONOMY

Format: MS WORD  |  Chapter: 1-5  |  Pages: 57  |  3298 Users found this project useful  |  Price NGN5,000

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THE ROLE OF STOCK MARKET IN THE GROWTH OF THE NIGERIAN ECONOMY

 

CHAPTER ONE

INTRODUCTION

1.1     BACKGROUND TO THE STUDY

Primarily, a stock market is the place where companies can raise money to make their businesses bigger and better. Companies raise money by selling shares or stocks to investors. At the same time, the stock market gives investors an opportunity to invest in these companies and benefit from any profit they can make. A stock market can also be called a capital or securities market as it encompasses the stock exchange, the branches, and the stockbrokers. An organized securities market requires a securities exchange, a securities commission or other regulatory agency, and intermediaries such as dealers, brokers, securities analysts, etc. Virtually all costs are borne by those who benefit. The intermediaries receive their fees from the issuers or investors to whom they provide a service. The stock market is usually funded through fees paid by investors and issuers; even the expenses of the securities commission may be partially paid for by registration fees rather than being a major burden on the government budget.
Companies which go public are subject to continuous cost of providing financial information, transferring shares, paying dividends, and other aspects of shareholder relations. The stock market is the aspect of the financial system which mobilizes and channels long term funds for economic growth. The stock market embraces trading in both new issues (primary) and old issues of stocks (secondary). Securities are primarily of 2 types: debt and equity. Debt securities include federal government development stock (GDS), industrial loans, preference stocks, bonds etc, while equity securities mainly concern ordinary stocks which impose higher liabilities on the holders.
Portfolio investment in the capital market deals with an institutional arrangement involving the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange (NSE), the operators, and the investors. Stock market is viewed as a medium to encourage saving, help channel savings into productive investment, and improve the efficiency and productivity of investment. The emphasis on the growth of stock markets for domestic resource mobilization has also been strengthened by the need to attract foreign capital in non- debt creating forms. A viable equity market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises are in a privileged position because they can make investment from retained earnings and bank borrowings, while new companies do not have easy access to finance.
Without being subjected to the scrutiny of the stock market, big firms get bigger, and for the emerging smaller companies, retained earnings and fresh cash injections from the controlling shareholders may not be able to keep pace with the needs for more equity financing which only an organized market place could provide. The corporate sector would also be strengthened by the requirements of equity markets for the development of widely acceptable accounting standards, disclosure of regular, adequate, and reliable information. While closely held companies can camouflage poor investment decisions and low profitability, at least for a while, publicly held companies cannot afford this luxury. The availability of reliable information would help investors make comparism of the performance and long term prospects of companies; corporations to make better investment and strategic decisions; and provide better statistics for economic policy makers.   The capital market in any country is one of the major pillars of long term economic growth and development.
The market serves a broad range of clientele including different levels of government, corporate bodies, and individuals within and outside the country. For quite some time now, the capital market has become one of the means through which foreign funds are being injected into most economies, and so the tendency towards a global economy is more feasible/ visible there than anywhere else. It is, therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring overall economic growth of a nation. Historically, the financial sector in the developing world has been primarily bank based. But, in recent years, there has been a gradual shift to a more holistic approach which, alongside the banks, seeks to develop the securities market. Some of the strength of the securities market which makes them the focal point of the shifting emphasis is their ability to:
1. mobilize long term savings for financing long tenure investments;
2. provide risk capital (equity) to entrepreneurs;
3. encourage broader ownership of firms; and
4. Improve the efficiency of resource allocation through competitive pricing mechanisms.
5. Provision of alternative sources of finance other than taxation and foreign loan to fund public projects.
Apart from these primary benefits, a developed securities market in the sense of efficient financial intermediation further brings additional gains to the economy. These gains arise through:
1. lower cost of equity capital for firms;
2. imposition of discipline on corporate managers as share prices react to right and wrong judgment in firm’s investment decisions;
3. existence of mechanisms for appropriate pricing and hedging against risk; and
4. Increased flow of funds to the domestic economy as international capital responds to the thriving stock market.
The development of securities market could help to strengthen corporate capital structure and efficient and competitive financial system. The stock market encourages savings by providing households with an additional instrument which may better meet their risk preferences and liquidity needs.   In well developed capital markets, share ownership provides individuals with a relatively liquid means of sharing risks in investment projects. To the extent that securities and bonds are a viable and relatively secure form of investment with an attractive long term return, they serve two functions:
-  stocks provide an incentive to save and invest; and
-  Financial savings are promoted and domestic savings rate increase as whole.
Economic growth encompasses a sustained rise in the productive capacity of any economy and real output per capita as a basis for sustained improvements in the living standards and quality of life of the entire population over a period of time. A build up of productive capacity is a necessary pre- requisite for growth. It is this capacity that determines the level of output of goods and services in the economy. Investment is said to represents net increase in an economy’s capital stock, and it leads to growth. If this is so, then it can be said that there is a relationship between capital accumulation and economic growth.  
1.2 STATEMENT OF THE PROBLEM
Mobilization of resources for national development has long been the central focus of development. To this end, various papers, research works, seminars, e.t.c. have been written and held to find the best way to mobilize resources for economic growth. It is now increasingly being recognized that the growth process of the Nigerian economy depends to a considerable extent on the effects of stock market. Whether this effect is positive or negative is a research problem to be solved. In the light of the research problems, this study attempts to answer the following:
1.  Does the market capitalization have a positive effect on GDP?
2.  Does growth rate of per capita income have a positive effect on GDP?
3.  What are the effects exchange rates on GDP?
1.3 SCOPE OF THE STUDY
In an attempt to analyze the role of the stock market in the Nigerian economy, the data covering the period of study is between 1975- 2004 i.e. a period of thirty (30) years. The reason being that, a study period this long will, probably, reduce any form of bias in the results of estimates.  
1.4 OBJECTIVES OF THE STUDY
The main objective of this study is to examine the role which the stock market plays in the growth process of the Nigerian economy. However, the other objectives include:
1. to determine if the stock market can lead to economic growth by boosting international investment climate;
2. to evaluate major determinants of investment in stock market;
3. to find out if the stock market, in growing the Nigerian economy, relates to the privatization exercise;
4. to find out the major problems of the stock market;
5. to find out the measures that have been put in place to enhance the efficiency of the stock market;
6. to make constructive recommendations on how to increase stock market efficiency, hence, economic growth.
1.5 JUSTIFICATION OF THE STUDY
Due to the fact that there are no viable equity markets, the capital structure of firms are generally characterized by heavy reliance on international finance and bank borrowings which tend to raise debt/ equity ratios. Thus, the development of an active market for stocks could provide an alternative to the banking system for both savers and users of funds. Several interactive studies have revealed the positive role the stock market plays in leading an economy to growth, which is a prerequisite for development.
For instance, Demirguc- Kunt and Levine (1993) have observed that increased flow of funds to the domestic economy as international capital responds to the thriving stock market is one of the gains accruable. In view of the above facts, the need arises to study how developed the Nigerian Stock market is and the role it plays in leading this economy to growth, hence development. It is expected that this study will attempt to make some contributions along this line spelt out of the aforementioned.  
1.6 RESEARCH QUESTIONS
In the light of the research problems, this study attempts to answer the following:
1. Does the market capitalization have a positive effect on GDP?
2.      Does growth rate of per capita income have a positive effect on GDP?
3. What are the effects exchange rates on GDP?  
1.7 HYPOTHESIS OF THE STUDY
H0: there is a negative relationship between market capitalization ratio and GDP
H1: there is a positive relationship between market capitalization ratio and GDP
H0: there is a negative relationship between investment and GDP
H1: there is a positive relationship between investment and GDP
1.8 RESEARCH METHODOLOGY
To carry out an econometric analysis of the study, the Ordinary Least Square (OLS) estimating techniques will be used because it possesses a unique property of Best Linear Unbiased Estimator (BLUE) when compared to other estimating techniques. The OLS method also possesses the desirable properties of un-biasness, consistency, and efficiency.  
1.9 SOURCES OF DATA
Data used in this research project are secondary data. The data used were gotten form authentic sources, some of which are listed below:
i.  The Nigerian Stock Exchange - Nigerian Stock Exchange fact book; - Nigerian Stock Market annual; - Publications and journals from reputable scholars;
ii.  Statistical Bulletin of the Central Bank of Nigeria
iii. National Bureau of statistics.
1.10  STRUCTURE OF THE STUDY
The structure of the study includes five chapters, each chapter deals with different aspects of the study. Chapter  one is basically an introductory chapter, it includes the background of the study ,statement of problem ,  objectives of the study, justification of study, objective of the study , research hypothesis , scope of the study. Chapter two deals with theoretical framework as well as the literature review of relevant literature on the role of stock markets in growing Nigeria’s economy. This chapter also considers the history and the development of Nigeria’s stock market over the years. In Chapter three we considered the research methodology. In this chapter the model that captured the relationship between economic growth and the stock market was specified and estimated .It also defines relevant variables used in study. Chapter four also includes analysis and presentation of the results of our estimated model. Chapter five summarizes the major findings emerging in this study.

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