An analysis of the economic impact of stock market on nigerian economy (1986-2010)

Thesis Overview

<p> </p><p>1.0 INTRODUCTION<br>1.1 BACKGROUND OF THE STUDY<br>11<br>The stock market is supposed to play an important role in the<br>economy in the sense that it mobilizes domestic resources and<br>channels them to productive investments. However, to perform this<br>role it must have significant relationship with the economy.<br>The development of stock market in Nigeria, as in other developing<br>countries has been induced by the government. Though prior to the<br>establishment of stock market in Nigeria, there existed some less<br>formal market arrangement for the operations of the stock market. It<br>was not prominent until the visit of Mr. J.B. Lobynesion in 1959, on the<br>invitation of the federal government, to advice on the role the central<br>bank could play in the development of the local money and stock<br>market. As a follow-up to this, the government commissioned and set<br>up a Barback committee to study and make recommendations on the<br>ways and means of establishing a stock market in Nigeria as a formal<br>market. (Alile and Anao 1990)<br>12<br>Capital markets are key elements of a modern market-based<br>economic system as they serve as the channel for flow of resources<br>from the SAVERS of capital to the BORROWERS of capital. Efficient<br>capital markets are hence essential for economic growth and<br>prosperity. With growing globalization of economies, the international<br>capital markets are also becoming increasingly integrated. While such<br>integration is positive for global economic growth, the downside risk is<br>the contagion effect of financial crisis especially if itsorigin lies in the<br>bigger markets.<br>As for the effect of macroeconomic variables such as money supply<br>and interest rate on stock prices, the efficient market hypothesis<br>suggests that competition among the profit maximizing investor’s<br>impact of macroeconomics. Variables on stock market will ensure that<br>all the relevant information currently known about changes in<br>macroeconomics variables are fully reflected in current stock market,<br>so thatinvestors will not be able to earn abnormal profit through<br>13<br>prediction of the future stock markets investments. (Chong and Koh<br>2008).<br>Therefore, since investment advisors would not be able to help<br>investors earn above average returns consistently except through<br>access to employer insider information.<br>Stock market is a critical log in the wheel that smoothens the<br>transfer of funds for economic growth. Broadly speaking, stock<br>exchanges are expected to accelerate economic growth by increasing<br>liquidity of financial assets, making global diversification easier for<br>investors and promoting wiser investment decisions. In principle, a well<br>functioning stock market may help the economic growth and<br>development process in an economy through growth of savings,<br>efficient allocation of investment resources and alluring of foreign<br>portfolio investments. The stock market encourages savings by<br>providing the household having investable funds, an additional financial<br>instruments which meets their risk preferences and liquidity needs<br>14<br>better, it in fact provides individuals with relatively liquid means for risk<br>sharing in investments projects.(Agrawalla 2006).<br>The stock markets capacity to contribute to the development of<br>the economy has been largely impaired by various inadequacies. The<br>market over the years have been characterized by-Lack of depth with<br>few securities-poor liquidity, partly due to inefficiency-Poor<br>infrastructural for secondary market operations-Basically, an equity<br>market with largely dormant bond market-High transaction costs-Lack<br>of sophisticated product investments and instruments. The market is<br>mainly dominated by traditional instruments such as BONDS and<br>EQUITIES with limited derivatives-Unfavorable tax regime-Unstable and<br>largely in appropriatein macro-economic environment.<br>1.2 STATEMENT OF THE PROBLEM<br>InNigeria, the capital markets have over the years been performing its<br>traditional role. However, its efficiency and effectiveness in this regard<br>15<br>have been greatly limited by various factors notable among which are<br>price level and the structure of the economy, which is dominated by oil<br>production, yet, the oil producingcompanies are listed on the stock<br>market, the lack of long term capital in the business, the business<br>sector depends mainly on short-term financing such as overdrafts to<br>finance even long term-capital. The economic reforms of the federal<br>government particularly those that have taken place in the financial<br>sector are therefore intended among other objectives to attain. The<br>focus of this paper is to examine stock market and it’s impact on the<br>Nigerian economy.<br>As a result of the above, the market has therefore not been in the<br>best position to contribute maximally to economic growth and the real<br>sector. These inadequacies have made the reforms that have taken<br>place over the years imperative. Recent reforms in stock market with<br>the enactments of the Investments and SecurityAct (ISA) no 45 of 1999<br>16<br>which replaced the SEC degree of 1986. Other reformsthat have been<br>taken place in the stock market include:<br>-Review of minimum capital requirement for operators.<br>-Reduction of transaction costs.<br>-Introduction of code of corporate governance.<br>-Reactivation of the Bond market.<br>-Introduction of market makers.<br>-Introduction of self registration.<br>-Development of a commodity market.<br>Many emerging stock markets are being restricted by lot complaints<br>which impede the realization of capital market serving as a catalyst for<br>economic growth. Such problems include:<br>A.Unquoted companies: Many companies are not quoted because of<br>perceived loss of control. They are afraid of sharing the ownership of<br>17<br>the company with others and because of this reason they prefer to<br>restrict themselves to funds provided by family members and friends<br>and are therefore unable to unanticipated challenges in a timely<br>manner.<br>B. Domination of public sector: The dominance of public<br>sector like government s has greatly hindered the capital market<br>growth as many them are yet to be privatized(especially the public<br>utilities)that can deepen the market almost immediately.<br>C. A lot of sharp practices exist in the flow of the exchange<br>fostering improper disclosure of information, unfairpricing, insider<br>dealings e.t.c<br>Currently, the performance of the Nigerian stock market during the<br>last month rallied 118 points or 7.3%. from 2013, the Nigerian stock<br>market average 1106 index points reaching an all time-high of 1718<br>index point in may 2013 and a record of 848 index points (NSE 30).<br>This rise and fall of the Nigerian stock market index point has resulted<br>18<br>in the slow meltdown of the capital market. This meltdown of the<br>capital market could result in unbalances on the economy.<br>According to the NSE report the process of this rise and fall began<br>in January 2007 as the capital market nose-dived from all time high of<br>₦13.5 trillion to less than ₦4.6 trillion by the second week of January.<br>The all share index has also plummeted from abroad 66,000 basis<br>points to less than 22,000 points in the same period. It has also<br>experienced a free for all downward movement with more than 60%<br>of 300 quoted stocks. Consequently, many of the quoted stocks lack<br>liquidity as their holders are trapped, not able to convert to cash to<br>meet their domestic needs thereby creating a major problem. When<br>this occurs, stockholders begin to withdraw and foreign investments<br>are lost and this results to a negative developmenton the Nigerian<br>economy.<br>1.3 OBJECTIVES OF THE STUDY<br>19<br>The central objective of this study is to analyze the economic<br>impact of stock market on Nigerian economy. The specific objectives<br>include;<br>1. To examine the relationship between stock market and<br>Nigeria’sgross domestic product.<br>2. To assess the level of stock market stability in Nigeria.<br>3. To appraise the performance of the Nigerian stock market.<br>4. To make policy recommendations at the end of this study.<br>1.4 RESEARCH HYPOTHESIS<br>The research work is guided by the following hypothesis.<br>1. Ho: There is no significant relationship between stock market and<br>Nigeria’s gross domestic product.<br>H1: There is a significant relationship between stock market and<br>Nigeria’s gross domestic product.<br>20<br>2. Ho: Stock market does not have economic impact on the Nigerian<br>economy.<br>H1: Stock market has economic impacts on the Nigerian economy.<br>1.5 SIGNIFICANCE OF THE STUDY<br>The general relevance of the study lies in its understanding of the<br>Economic Impact of Stock Market on Nigerian economy and so will be<br>particularly relevant in the following areas.<br>A. In particular, by using Nigeria stock market as empirical evidence,<br>the research will provide quantitative information which will enable us<br>to ascertain whether or not stock price fluctuations have impact on<br>the Nigerian economy. The finding of the study will reveal or will<br>therefore be relevant to the government and policy makers in finetuning<br>stock market policies that will be applied to ascertain<br>sustainable in the Nigerian stock market.<br>B. Also, it will relevant to the stock market operators, monetary<br>institutions or authorities and regulating agencies to harness and fine-<br>21<br>tune stock market prices to promote high performance level especially<br>at this critical moment of global economic crises and the nation’s<br>economic circumstances.<br>C. The findings if the study will equally afford quoted companies the<br>stock opportunity to assess whether or not they have been<br>performing well in terms of price stability.<br>D. Finally, a further justification for the study is the benefit of<br>applying the economic analysis of the impact of stock market in<br>Nigeria to economic and financial analysis kits and increases the stock<br>of knowledge in both the stock market and the Nigerian economy.<br>1.6 SCOPE AND LIMITATIONS OF THE STUDY<br>This work is a study of economic impact of stock market on the<br>Nigerian economy. The study employs empirical evidencefrom both<br>stock market using the Nigerian stock exchange and Nigerian economy<br>as whole. The choice is made out of the researcher’s interest in the<br>given country’s stock market and economic circumstances. The period<br>22<br>covered by the research is twenty-five (24) years period 1986-2010. The<br>availability of uniform data on the variables informed the researcher’s<br>choice of the period of analysis.<br>This study is limited by the following factors;<br>1. Paucity of materials: Materials for the study were not adequate<br>which could not allow for an in-depth study.<br>2. Inaccessibility of data: Difficulty in accessing data for the study<br>was yet another limitation.<br>3. Financial constraint: Lack of adequate funds on the part of the<br>researcher constituted another problem.</p><div><div></div></div><br> <br><p></p>