AN ANALYSIS OF IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA

Abstract

This study was on an analysis of impact of stock market development on economic growth in Nigeria. two objectives were raised which included; to analyze the dynamic relationship between market capitalization and total value traded and to find out the relationship between turnover ratio and economic growth in Nigeria. A total of 77 responses were received and validated from the enrolled participants where all respondents were drawn from CBN, Abuja. Hypothesis was tested using Chi-Square statistical tool (SPSS).

Chapter one

Introduction

1.1Background of the study

Mobilization of resources for national development has been the central focus of development economists. As a result, the centrality of savings and investment in economic growth has been given considerable attention in the literature. Financial markets, especially stock market have grown considerable in developed and developing countries over the last two decades. As economies develop, more funds are needed to meet the rapid expansion. Thus, stock market serves as a veritable tool in mobilizing and allocating savings among competing uses which are critical to the growth and efficiency of the economy (Alile 1984). The determination of the overall growth of an economy depends on how efficient the stock market performs its allocative functions of capital. As the stock market mobilizes savings concurrently, it allocates a large proportion of it to the firms with relatively high prospect as indicated by its rate of returns and level of risk. The importance of this function is that capital resources are channeled by the mechanism of the force of demand and supply to those firms with relatively high and rapidly increasing productivity, thus, enhancing economic expansion and growth (Alile 1997). Gerald (2006) also states that stock market development is important because financial intermediation supports the investment process by mobilizing household and foreign savings for investment process by firms. For sustainable growth and development, funds must be effectively mobilized and allocated to enable business and economy harness their human, material and management resources for optimal output. Therefore, Mislikin (2001) and Caporale (2004) assert that organized and managerial stock market stimulates investment opportunities by recognizing and financing productive projects that lead to economic activity, mobilizes domestic savings and facilitates exchange of goods and services

However, with recent developments in the economic growth theory, there has been a shift in the focus of growth literature from the traditional factors (capital, labour and technology) to other factors that might also contribute to the growth process. These other factors include financial and stock market development, macroeconomic environment, political stability and foreign direct investment (FDI), among others. Stock market development provides a platform that helps in improving the allocation of capital and thus enhancing the prospects of long-term economic growth. A liquid stock market development offers the potential for investors to quickly and cheaply alter their portfolios thereby reducing the riskiness of their investment, thus, facilitating investments in projects that are more profitable (Ezeabisili & Alajekwe, 2012). Without a liquid stock market, many profitable long-term investments would not be undertaken because savers would be reluctant to tie up their investments for long periods of time (Okonkwo, Ogwuru & Ajudua, 2014). Beck and Levine (2002) observed that a well-functioning stock market fosters growth and profit incentives and also helps in risk management. It has also been observed that more developed market may provide liquidity that lowers the cost of the foreign capital essential for development, especially in low income countries that cannot generate sufficient domestic savings (Bencivenga, Smith and Stair 1996). A well-functioning stock market fosters growth and profit incentives and helps in risk management more efficiently than the bank-based system does (Levine, 2002 and Beck and Levine, 2002). Bencivenga, Smith and Starr (1996) expounds theoretically that a more developed stock market may provide liquidity that lowers the cost of the foreign capital essential for development, especially in low-income countries that cannot generate sufficient domestic savings. Levine and Zervos (1998), Demirguc-Kunt and Levine (1996) and Atje and Jovanovic (1993) envisaged that stock market development is vital for economic growth. The fluctuation of general stock market index expresses the level of economic growth, the degree of trade openness and the financial depth in a developing or developed country.

Statement of the problem

However, there is need for development of stock market whether the country is developed or still in its developing stages. Therefore, understanding the relationship among the three stock market indicators is very crucial to the country’s economic development as posited by IMF (2002) which is yet to be enforced in Nigeria. Also empirical works have confirmed the likelihood of having a kind of diverse forms of relationship among the three stock market indicators. There is therefore the need to critically examine these forms of relationship and this would guide in formulating policy that would positively influence them and transform the influences to the overall economic development of the country (IMF 2002). This among others formed the basis for this research work

Objective of the study

The objectives of the study are;

1. to analyze the dynamic relationship between market capitalization and total value traded
2. to find out the relationship between turnover ratio and economic growth in Nigeria

Research hypotheses

The following research hypotheses were formulated;

H0: there is no dynamic relationship between market capitalization and total value traded

H1: there is dynamic relationship between market capitalization and total value traded

H0: there is no relationship between turnover ratio and economic growth in Nigeria

H2: there is relationship between turnover ratio and economic growth in Nigeria

Significance of the study

The study will be very significant to students and the government of Nigeria. The study will give a clear insight on the impact of stock market development on economic growth in Nigeria. The study will find out the relationship between market capitalization, value traded and turnover ratio in Nigeria economy. The study will also serve as reference to other researcher that will embark on the related topic

Scope and limitation of the study

The scope of the study covers an analysis of impact of stock market development on economic growth in Nigeria

Limitations/constraints are inevitable in carrying out a research work of this nature. However, in the course of this research, the following constraints were encountered thus:

1. Non-availability of enough resources (finance): A work of this nature is very tasking financially, money had to be spent at various stages of the research such resources which may aid proper carrying out of the study were not adequately available.

Time factor: The time used in carrying out the research work is relatively not enough to bring the best information out of it. However, I hope that the little that is contained in this study will go a long way in solving many greater problems.

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