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Examination Of The Relationship Between Capital Market And Economic Growth In Nigeria Using Time Series Analysis




The study is on “Examination of the Relationship between Capital Market and Economic Growth in Nigeria Using Time Series Analysis”. The study has four objectives and four research questions. This study adopts a time series research design with reliance on data from the CBN statistical bulletin and the NSE annual reports. The study will cover the period 1985-2012. The area of study was the Nigeria stock exchange market. Generally, securities exchange Market and business time. The study will make use of regression analysis as the data analysis method. However, it will incorporate multivariate co-integration and error correction in order to undertake a thorough examination of the characteristics of time series economic data. The findings reveal that a long-run inverse relationship is observed to exist between GDP and market capitalization. The relationship between (TONIS) and the Gross Domestic Product in the long-run is observed to be positive. However, the long-run relationship between total listing (TOLIST) in the stock market and GDP is observed to be inversely related to GDP. Also an inverse relationship was also observed to exist between value of transaction (VALTRAN) in the stock market and GDP. The specified error correction term (Ut-1(ECT) The error correction coefficient term coefficient of -0.33 which measures the speed of adjustment towards long-run elasticity of GDP. Based on the findings, the study therefore recommends that regulatory agencies in the capital market should be focused on enhancing the efficiency and transparency of the market in order to improve investors’ confidence. Also, there is need for effective and favorable macroeconomic environment to facilitate the causality from stock market to economic growth. It must be understood that growing economies with significant and consistent impact on living standards of the people are a product of effective social, economic and political institutions and this is a major setback in the Nigerian environment. Thus there is the need to ensure that the channels of capital market induced growth are built around effective systems and that the policy institutions are actively involved in making systemic checks and appropriate policy innovations to ensure capital market led economic growth.




The financial system in any economy assumes the highest position in economic development. The Nigerian financial system consists of banks and non bank financial institutions, financial markets, financial instruments of different kinds and duration, rules and regulations that guide the system as well as the mechanism by which the components of the system within the overall economic system interrelate. The financial market comprising of capital, money and foreign exchange markets, and a component of the Nigerian financial system acts as a conduit pipes through which scattered resources are mobilized to those deficit areas that will put it into productive use. These institutions play colossal roles in the development of the economy. The effectiveness and efficiency in performing these roles, particularly the intermediation between the surplus and deficit units of the economy depends on the level of development of the financial system (Aderibigbe, 2014). This explains the motive behind various economic reforms especially pension funds and other financial sector reforms in the country. Hambera and Navak, (2010); one is not aware of any expansive study that has explored the subject of value relevant to accounting information in Nigeria.

The process of financial intermediation involves the mobilization and allocation of funds through the financial markets by financial institutions (banks and non banks) and by the use of financial instruments. Mobilization of fund for economic development has been a salient issue to economic development. As a result, savings and investment has been most important development economic variables and a focus of development economists (Olagunde, et. al., 2016). Existing literature shows that ways through which resource mobilization affects the economic growth and development are through money and capital markets.

The stock exchange, the center piece of the secondary capital market happens to be one of these important institutions for effective fund provision. The overall growth of the economy depends on how efficiently the stock market performs its function of resource allocation to various economic units. This function enables firms to harness long term cheap capital fund for increase productivity and thus enhancing economic growth. It is imperative to deepen the financial market for desired economic development and global competitiveness (Yartey, 2008). This however could be achieved through a long term security market for investment instruments with long gestation period. The subject matter of this research revolves around stock market development and what determines its development in Nigeria.

Value relevance is defined as the ability of accounting numbers contained in the financial statements to explain the stock market measures (Besland 2009). A financial market is an institution or arrangement that facilitates the exchange of financial assets (Baye and Jansen, 2016:31). Koirala (2011), Nowbusting and Odit (2010) asserts that market capitalization and ratio exerts positive statistical significant effect on gross domestic product in Nigeria. As such, one could think of a market as the place where those with a demand finds supply. Virtually, all aspects of human endeavor entail the use of money either self generated or borrowed. In capital market, the stock in trade is money which could be raised through various instruments under well governed rules and regulations carefully administered and followed by different institutions or market operators (Adewuyi and Kolawole, 2011). A man wanting an apple will go to a food market and buy one. The same applies for stock; those who want stock get it from stock exchange market. Stock exchange market matches those who want capital (borrowers) and those who have it (lenders) (Saksouk and Pires, 2015).

Saksouk and Pires (2007) went on to say that there are intermediaries like banks or insurance companies that play the role of matching the borrowers with the lenders in the market for a fee. They gave illustration as follow:


Lenders   Intermediaries   Markets   Borrowers
Individuals or Banks, Stock – Individuals or
companies with Insurance comp. Exchange companies that
extra money         need money

In the illustration above, individuals or companies who have extra money places it in financial intermediaries like banks for custody. Those intermediaries will go to the market and offer it to those who need it for a return known as interest rate. As such, for a market to exist, it needs suppliers, buyers, a turnover subject, a price for that subject and a regulatory authority to regulate activities and protect the interest of those in the market.

It is undisputable fact that a borrower who require long term funding, far longer than the duration for which most savers are willing to commit their money can raise it from organized market such as stock exchange. It is an arrangement where large and small investors alike buy and sell securities (shares and bonds) of companies and government through stock brokers. However, it disagrees with Aiguh (20150 that market capitalization ration is negatively related to economic growth. It is a known fact that the importance of stock market development cannot be denied in any economy. Stock market has been viewed as an engine of development whether in developing or developed economies. The Nigerian stock exchange provides the essential facilities for companies and government to raise money for business expansion and development through investors who subscribed to the share in the companies in expectation of returns and for the ultimate benefit of the economy. In this market, investors provide long term funds in exchange for long term financial assets offered by borrowers (Adewuyi, 2010).

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Particularly, both the ideas that financial development accelerates economic growth and that the degree of maturity of financial markets represents a good predictor of the potential of economic growth are largely accepted. This is because the financial institutions gathering the information mitigate the problems that arise from the information asymmetries and reduce the transaction costs, mobilize the private savings and improve the allocation efficiency (Sarno, 2008). The importance of these functions is that capital resources are channelled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity thus enhancing economic expansion and growth.

Most under developed countries in which Nigeria is one are characterized by emerging stock markets. The link between stock market performance and economic growth has generated controversy among analysts based on their research of developing and emerging markets. Emphasis is laid by Riman, et. al., (2008), they examined the link between economic growth and stock market development in Nigeria. They emphasized a long run positive contribution between stock market performance and economic growth. However, the Nigerian stock still seems to have a long way to go when compared with developed stock markets (Ologunde, Elumaide and Asaolu, 2006). More funds are needed to meet rapid expansion as the economies develop. This will be possible in a well developed stock market capable of facilitating long term profitable investment and foreign capital inflow. Liquid market improves the allocation of capital and enhances the prospect of long economic growth. Many emerging market specialists believe that emerging stock markets are the last undiscovered stock markets in the world. Krugman (2010) and stiglitz (2012) have argued that financial markets in emerging nations are poorly developed and thus they do not function properly; the way that financial markets in advanced countries do.

The underdeveloped nature of a country retards economic growth and hamper stock market development. In the capitalist economy, stock market constitutes the most important institution for massive capital formation geared towards economic development (Ologunde, et. al., 2006). Inversely, retarded economies result in stagnation and poor acceleration in stock market growth. A well developed stock market enhances massive mobilization of long term resources from surplus to deficit sectors, improves market liquidity, market size (capitalization rate), and creates appropriate mechanism for capital formation geared towards economic development (llmolelian, 2005). Nwude (2003: 397) opines that the promotion of a capital market is intimately tied up with the objective of accelerated economic development. Claessans, et. al., (2002), Yartey and Adjasi, (2007) held that economic growth plays an important role in stock market development through policies initiation by the government to foster growth and development as countries liberalize their financial systems.

The degree of importance of stock market development in nations’ economy is a motivational factor to scholars’ delving in researches as; stock market development and economic growth, whether stock market promotes economic growth, measures of stock market development, stock market development in emerging market economies, determinants of stock market development in context of various economies of the world. Nigerian stock market is developing markets requiring accelerated growth to boost economic development. However, the Nigerian stock market witnessed significant growth since the introduction of structural adjustment programme (SAP). This is as a result of deregulation of the financial sector and the privatization exercises, which exposed investors and companies to the significance of the stock market (Alile, 1984). Uninterrupted democratic rule since 1999 and measures taken by Obasanjo government guaranteed reasonable human rights and socio economic development. Companies, organizations and other institutions operate in a relatively conducive environment which serves as a platform for foreign investment (Wapmuk and Oshinowo, 2007).

Though stock market is growing, it however witnessed some hitches. From 2004 – 2008, there was steady upsurge in oil prices; the economy was not able to absorb the excess liquidity from oil revenues and foreign investments in productive sectors. This lead to significant flows to the capital markets in form of margin loans and proprietary trading camouflaged as loans. This resulted in increase in stock market capitalization by 5.3 times. Notably, market capitalization of banks stocks increased by 9 times setting a stage for a financial asset bubble especially in banks stock (Sanusi, 2010). The rapid increase in asset prices is an indication to crash the stock market. According to him, in 2007 the Nigerian stock exchange was the best ‘performing bourse’ in the world even though there was no evidence to suggest a commensurate improvement in the fundamentals of the real sector corporations. All other countries that experienced rapid growth of financial assets crashed and suffered years of low growth.

Bank capitalization of 2004 from N2b to N25b, representing 1150% increase was intended to bring change to the Nigerian economy through the banking industry. The expected change was restricted by the fact that such significant increase in capital was not matched by comparative increase in domestic economic opportunities. Many banks as well as insurance companies that were required to recapitalize by the end of 2007 went to the capital market to raised fund in order to meet the recapitalization requirement (Okereke – Onyeuke, 2007). The equity market experienced unprecedented expansion within the span of three years but huge amount of the fund raised went out through capital flight (Udom, 2009). The N25b bank recapitalization unleashed the outflow of Nigerian bank capital to smaller African countries with less sophisticated financial systems and regulation. Total of 10 out of 24 licensed banks in Nigeria own a fully fledged licensed banks in foreign land (Uche, 2010). Such unprecedented capital flight poses a threat to a developing economy with developing capital market. There was significant growth in capital market; market capitalization rose from N1.36b in 2003 to N2.1b in 2014.

In 2008, the stock market crashed. Sanusi (2010) opines that Nigerian stock market faltered and the financial system experienced a crisis in 2009, triggered by the global events resulting to stock market collapsed by 70% in 2008-2009. The collapse of the stock market rendered many investors bankrupt. Many who borrowed fund at high interest rate could not pay back as a result of meltdown of their borrowed fund. The collapse of the stock market triggered by global financial crisis exacerbated the thinness, shallowness and illiquidity of the Nigerian stock market in particular and African stock market in general. This was in line with Uche’s (2009) assertion as in African development bank et. al., (2008), Velde (2008), Williams (2009), and Heliso (2009) when he asserted that, ‘the financial sector of Africa remains shallow and thin, capital markets are still illiquid and the system is weakly linked to the global international financial system’. As the result of the crisis, economic agents loss confidence in the financial system which hampers its ability to carry out its intermediation function; credit crunched, illiquidity sets in and firms started posting losses which made investors reconsider their decisions in capital market investment. Stock market indices fall affecting firms’ position and investors’ wealth (Abdurrahman and Obiechina, 2009).

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Apart from these constraints, the stock market is characterized by some other problems. The problems ranges from high cost of raising fund, illiteracy, lack of awareness, technological problems, greediness and dubious attitude of some company executives who do not declare dividend to shareholder even when the company made profit (Aguwamba, 2005). Till today the stock market is yet to recover from these crises.

It is against these backdrops that appropriate measures to improve in areas towards meaningful stock market development are of paramount importance. Macroeconomic factors such as income level, gross domestic investment, banking sector development, private capital flows, and stock market liquidity are important determinants of stock market development in emerging market countries. Political risk, Level of financial intermediaries’ development, the fundamentals development, Level of international integration, law and order, and bureaucratic quality are also important determinants of stock market development because they enhance the viability of external finance (Yartey, 2008, llmolelian 2005). Determinants of upward and downward trending of the stock market prices (Nwude, 2010).


The low level of development witnessed in most developing economies’ stock market including Nigeria has resulted in the under- performing of these countries’ economies. Hence, the benefits which could accrue to such nations as a result of having a world class stock market have eluded the Nigerian investors as a result of backward nature of the economy. This could be attributed to several factors which possibly could determine stock market development.

For instance, low level of savings by the populace poses influence on stock market development. Nigerian economy consists of individuals who either consume or save from their meager income or firms that borrow unconsumed income as loans and invest. It means that whenever individuals and firms save, capital is generated. This income is either consumed and the remaining part saved. As they save, borrowers will borrow from this pool of savings in order to invest. Nigeria as a developing country is characterized by unemployment, low per capita income, retrenchment of staff, and nonpayment of salary and as at when due, even where these employees are under paid, high rate of inflation, low capacity utilization and all sorts of bottleneck that hinder savings. In fact, over 70% of populace lives in poverty (Sanusi, 2010). The amount of savings by institutional and individual investors determines the amount of capital flow to investment.

Investors’ decision on choice of financial institution to invest in affects investment. This depends to a large extent on taxation and the benefit that would be derived. According to Ioannidis and Kantonikas (2006) monetary policy actions affect stock prices, which themselves are linked to the real economy through their influence on savings, consumption spending and investment. Interest rate which forms part of monetary policy in Nigeria is managed by central bank. Central bank sets the deposit and lending rates of the financial intermediaries as well as the rate for lending to special sectors of the economy with the view of pursuing expansionary or contractionary monetary policy. If these rates are high, investors will shone banks and patronize capital market. Conversely, if the rate paid by banks to depositors is high, investors will patronize bank more than capital market and this will lead to decrease in capital market investment (Ologunde, et. al., 2006). These hitches contribute to low level of savings and investment and impede stock market development.

One of the problems that foreign investors face when investing in developing countries like Nigeria is political risk. The huge challenges of instability in the country today are a major constraint for domestic and foreign investments. The escalation of the Boko Haram threat and other terrorists’ activities including the incessant killings, bombing by these sects poses a serious threat to investors. The nefarious activities in the economy including lack of infrastructural deficiency such as energy, capacity building, access to education, poor funding of developmental projects, political will, corruption, maladministration, embezzlement, misappropriation and misapplication of funds allocated for projects, political consideration for location of industries rather than economic consideration, cost of doing businesses and political interference have all impacted negatively on the level of investment in the country.

Also, the absence of liquid market is posing challenges to stock market development. Low level of activity in Nigerian stock market constitutes a barrier to stock market development. Market liquidity refers to the situation at which investors’ buy and sell stocks easily. The level of transactions in the market is low compared to the size of the economy. Lack of awareness compounded by ignorance of most Nigerians contributes to low level of transaction. Most small scale investors lack the skill and knowledge of how to actualize their dreams through stock market investment. Beside small scale investors and individual investors know little or nothing about stock market transaction. With the population of about 150 million people in Nigeria, large number of people lacks a complete knowledge of the existence of the stock market. Ologunde, et. al., (2006) as in Anyanwu (2008) identified ignorance as one of the problems of Nigerian Securities and Exchange Commission (NSEC) and the capital market is still very low. Buy and keep attitude of most investors resulting from illiteracy constitutes a greater problem. As a result, stock owners uninformed of the importance of stock disposal in the stock exchange market or the processes of disposal keep their certificates as an asset of inheritance for their children. The effect of this is overall reduction in market activity. For stock market to mobilize the amount of funds that will effect the economy, there must be high rate of transaction. Federal government resorting to other sources of financing outside the capital market is another constrain to market activity. The share of government stock in the capital market peaked at 97.9 percent of total trading activities in 1979/80. From 1986, its share persistently declined reaching 0.01% of traded securities in the market (Ugwuanyi, 2006:98). The decline was due to government’s deliberate effort not to float development stock again as from 1987 in order to allow the markets grow on their own (Ologunde, et. al., 2006). Towards early 1990, there was setback in the value of government securities in the stock market. This was connected with government policies on financial market deregulation. The period 2001-2012 witnessed uninterrupted democratic rule which impacted so much on stock market investment via relatively conducive environment in which companies, organizations and institutions can operate.

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The operations of the stock exchange have been very retrogressive given the number of firms listed on the exchange since its formation. The few numbers of listed companies have also contributed to low activity in stock market. In spite of the existence of second tier security market carved out as an arm of the first tier market to carter for small and medium size enterprises. The number of listed companies is still very low as it is difficult for most companies to get listed due to stringent entry conditions. The growth in the number of listed companies grows at a slow rate. For instance, the number of listed companies in 2001 was 194, 195 in 2002, 202 in 2003,200 in 2004, 214 at the end of 2006, this came down to 213 in 2008. There was again an improvement in 2009 and 2010 to 216 and 217 respectively. This looks shallow compared to stock market of countries of the world which are considered developed. More so, Nigeria still has only thirteen branches with trading floors in a country of 36 states (Okafor, 2010). The inadequacy and dearth of securities occasioned by all these affects the level of transaction resulting to low volume, value of securities traded as well as stock market capitalization. As a result, the Nigeria capital market which is supposed to be an avenue for sourcing long-term funds to finance long-term projects is not as developed as her foreign counterpart. It has therefore not been able to judiciously perform its primary obligation of meeting long-term capital needs of the deficit sectors, through efficient accumulation of capital from the surplus unit of the economy, and effectively channel mobilized funds for more economic use (Oke and Adeusi, 2012).


The main objective of this study is to examine the determinants of stock market development in

Nigeria. However, the specific objectives of this study are:

1 .To  evaluate the effect of government securities on stock market capitalization.

  1. To estimate the impact of equities on stock market.
  2. To establish the relationship between bonds and stock market value.
  3. To estimate the trend of deals in the number in a stock market.


This study tends to find answers to the following research questions;

1.What is the effect of government securities on stock market capitalization?

  1. Is there any impact of equities on stock market value.
  2. Is there any relationship between bonds and stock market value.
  3. What is the trend of deals in the number in the stock market.


The hypotheses for this study are:

H0. There is no effect of government securities on stock market capitalization.

H1.There is effect of government securities on stock market capitalization.

H02.There is no relationship between bonds and stock market value.

H2.There is relationship between bonds and stock market value.


The study covers the period 2001-2016. The area under study usually contributes and determines the extent to which the research study will cover. The choice of this period is to capture the events that took place in the country during that period and how it has affected stock market. This period is characterized by the boom, bubble and burst in stock market.

The period, 2001-2016 witnessed uninterrupted democratic rule which impacted so much on stock market investment via relatively conducive environment in which companies, organizations and institutions can operate. Conducive environment served as a plat form for foreign investors’ influx in stock market and hence increases inflow of fund to investment.

Banks reform in 2004 and insurance companies’ reform in 2007 greatly influenced stock market performance. In order to meet the recapitalization requirements arising from the reforms, banks and insurance companies went to the market to raise fund. The period witnessed unprecedented expansion via increase in stock market activities. Total market capitalization rose to N13.29b in 2007 from N2.11b in 2004 representing 84% increase, transaction at the stock exchange increased by 79% from 2004.

The period 2008 marked global financial crisis which impacted negatively on stock market. Sanusi, (2010) noted that the market collapsed by 70%. Market transaction dropped by 59% from 2008 to 2009, market capitalization also reduced by 26% in the same year.

To arrive at a conclusive result, the study covered such areas as the stock market development indicators, what measures stock market development as well as the functions of stock market.


The significance of stock market development throughout the whole countries of the world and its immense contributions in economic development cannot be undermined. This study will be of benefit to the following groups:

(a) Academia:

The intensified urge to develop stock market has resulted in many researches on the stock market development as well as growth determinants and the likes. This study however will add to existing literatures on this topic as well as a research material for future studies.

(b) Policy markers:

Government policy makers and regulatory institutions such as Securities and Exchange Commission (SEC) and Nigerian Stock Exchange (NSE) will benefit heavily. It is expected that this study will complement the efforts of the government and policy makers in reviving the Nigerian stock market and restoring confidence of shareholders and other participants in the market especially now that investors and shareholders confidence seems to be eroding.

It will also assist government in knowing the measures and policies to undertake to encourage stock market development, having known what determines its growth and the economic variables which if given serious attention, will improve stock market development and hence economic growth. It will assist market regulators to take appropriate measures to improve trading system by eliminating the identified problems hindering the development of the exchange. This will increase the ease with which investors buy and sell shares.


It is the desire of investors, borrowers, lenders, especially corporate institutions, to know that there is a market that can serve their various financial needs. To individual investors, it serves as an avenue to make quick and genuine fund which can easily turn them to a millionaire just by investing in stock and shares with a good return. Corporate institutions can raise long-term capital fund for expansion through the issue of debt or equity instruments.

Pages:  74

Category: Project

Format:  Word & PDF               

Chapters: 1-5                                          

Source: Imsuinfo                            

Material contains Table of Content, Abstract and References.


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