RELATIONSHIP BETWEEN MARKET VARIABLES AND PRIVATE INVESTMENT IN NIGERIA



CHAPTER ONE
INTRODUCTION
1.1                   BACKGROUND OF THE STUDY
            It is a known fact that investment promotes economic growth and development requires long- term funding far longer than the duration for which most savers are willing to commit their funds. Capital market is a collection of financial institution set up for the granting of medium and long term loans. (Ologunde, Eilumilade and Asadu, 2006). It is a market for government securities, for corporate bonds, for mobilization and utilization of long- term funds for development=the long- term end of the financial system.

            The capital market is the prime motor that drives any economy on its path to growth and development because it is responsible for long-term growth capital formation. The money market only complement the capital to support gross fixed capital formation. Unfortunately the Nigeria capital market has not fully performed its natural function of funding investment. One of the major indicators of capital market development is the proportion of long term fixed capital that is raise in relation to gross domestic product. Between 1999 and 2004, capital formation in terms of long- term funds raised from the market through new issues of securities to the gross domestic product averages only 1.36 percent while the new issues to gross fixed capitalization averages 16 percent market capitalization to gross domestic product averaged 14.25 percent during the same period ( Adedinran, 2012)
            Thus, capital market is a market where medium and long- terms finance can be raised. It is a market that offers a variety of financial instruments that enable economic agents to pool, price and exchange risk. In this market, lenders (investors) provide long term funds in exchange for long- term financial assets offered by borrowers. The market covers both new issues of stocks in the primary market and the sale of existing stocks in the secondary market. Such securities might be raised in an organized consortium under writing. Syndicated loans and project financing. It is a mechanism where by economic unit desirous to invest through surplus funds interact directly or through financial intermediaries with those who wish to procure funds for their businesses.
            The capital market is therefore very important to any economy because it encourages savings and real investment in any healthy economic environment. Through the market, aggregate savings are channeled into real investment that increases the capital stock and economic growth of the country. More so, the capital market synchronize the divergent preferences for portfolio manager and financial institutions and those of savers by mobilizing long term funds for portfolio managers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market without effecting the operation of the firms, their savings had earlier financed .
            Although a small market by international standard, the Nigeria capital market is one of the leading market in sub-Saharan Africa and has made some notable strides in recent years. With a history of over 67 years when the fist public issue was floated at N 600,000 (more than 300,000 pounds sterling) worth of government stocks and 59 years of stock exchange, equity listings and market capitalization and still relatively small, standing at 216 and united states $0.7billion, a much lower figure than market capitalization. As a result of this, federal government of Nigeria development loan stock was issued in line with its role of fostering economic and financial development. In 1986, Nigeria embraced the international monetary fund (IMF) structural adjustment programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s. The programme was proposed as an economic package to rapidly and effectively transform the Nigeria economy within two years ( Yusufu, 1996, Oyefusi and Moghalu, 2003, Umah, 2010).
            However, the turnover ratio of 7.9 percent was recorded at the end of 2002, higher than the average turnover ratio for 1998- 2002 (Ndanusa, 2003, Ozoh, 2011). From a historical perspective, this figure excepting for 2011 is an improvement, evidencing the continued rise in activities of the market. According to Central Bank of Nigeria (2011), the market has been quite active improvement with traded equities of N 19.8 billion (US$178 million) in January 2009 which represented about 28 percent of the total equity value in 2008.
            The depreciation of the currency, the naira has continued to impact on the size of the market in dollars terms. Between 1997 and 2002, the naira lost over half of its value to the dollar. As a result, while capitalization witnessed impressive growth in Local country terms, this was not the case in dollar terms as a much slower growth was registered.
            The capital market has not been a popular source of funds because of the instability in the economy, low yields to investors in capital market instrument and government’s overbearing presence in economic matters. The introduction of Structural Adjustment Programme (SAP) in Nigeria has resulted in significant growth of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market. The liberalization of capital market led to the growth of the Nigeria capital market yet its impact at the macro-economic level was negligible. Again, the capital market was instrumental to the initial twenty-five banks that were able to meet the minimum capital requirement of N25 billion during the banking sector consolidation in 2005. The stock market has helped the government and corporate entities to raise long-term capital for financing new projects and expanding and modernizing industrial/commercial concerns.
            Financial institutions have not contributed much in financing capital investment but they have contributed towards market development (Mary et al; 2012). Equity market capitalization grew by over N100 billion (US$16.1 billion) or 15 percent and has remained on the upward swing this year. This trend has continued such that following recapitalization of the banking sector, the market capitalization has doubled its 2002 value by the end of 2006.

1.2       Problem Statement
            There is now a growing evidence that the Nigerian capital market has witnessed tremendous growth over the past few decades. The central bank of Nigeria (2012) notes that the Nigerian stock exchange all sector index recorded a significant improvement during the years (2004, 2006 and 2010). At 21, 222-6 (1984=100), the index grew by 74.8 percent at the end of 2004, compared to 10.7 percent in 2003, with all sectors contributing to the increase. In 2003 alone, the market considered and approved 26 applications for new issues valued at N185.0 billion, as against 27 applications for new issues valued at N68.6 billion in 2002. Between 1999 and 2005, there was a phenomenal increase in total market capitalization of quoted companies. For example, total market capitalization was N294,104,956.9 in 1999 and by 2005, it had risen to N1,324, 897, 998.7 (CBN, 2006). In 2010, there was a clear indication that a long- run relationship exists between capital market and private investment in  Nigeria. The Nigeria stock exchange was to play a key role during the offer for sale of the shares of the affected enterprises. This resulted in the significant growth of the financial sector. For example, the recapitalization to meet the minimum capital requirement of N25 billion by the commercial banks with the central bank of Nigeria and the privatization exercise that exposed investors and companies in the country to the significance of the stock exchange.
            Our study is therefore informed by two main reasons, first, now that the Nigeria capital market has come a long way for the past two and half decades, what effects does it have on private investments in Nigeria? Unfortunately, data on private investment in Nigeria have failed to show convincing correlation with the unprecedented growth of the capital market. For example, the ratio of private fixed capital formation to GOP has shown a downward trend since 1980. the ratio was 0.19 in 1970, 0.25 in 1973 and decreased to 0.18 in 1980. Since 1984, the ratio has been less than 10 percent for most of the period between 1984 and 2010. One therefore wonders if there is any link between capital market development and the growth of private fixed capital formation in Nigeria.
            Second, though available literatures both theoretical and empirical have failed to agree on the impact of capital market on investment and consequently on economic growth, few studies have related capital market development to private investment growth in Nigeria. The most recent study (Kolapo and Adaramola, 2012) focus on stock market capitalization and economic growth in Nigeria.
            The study is, therefore, using econometric techniques aimed to address the above issues raised namely, the impact of capital market on the growth of private investment in Nigeria and the controversy surrounding the growth of capital market and economic growth via the growth of private investment.
1.3       Objectives of the Study
            The broad objective of the study is to investigate the relationship between market variables and private investment in Nigeria. More specifically,
a.         To determine the variables that affects the growth of private investment in Nigeria.
b.         To ascertain if the growth of capital market has impacted on the growth of private investment in Nigeria
c.         To ascertain alternative policies for the growth of private investment in Nigeria.

1.4       Research Hypotheses
            One major hypothesis that will be tested by this study is as follows
1.         Ho1:    The growth of capital market variables such as, market capitalization, liquidity etc does not have any significant effect on the growth of private investment.
2.         Ho2:    The growth of capital market has not impacted positively on the growth of private investment in Nigeria.

1.5       Significance of the Study
            Previous studies conducted which are similar to our study have devoted much attention on developed countries as well as other developing countries of Asia (Lynch, 1995, Pilgrim and Schich, 2010, Omoke, 2012). However, results from these studies cannot be attributed to such sub-Saharan Africa which has unique institutional and structural characteristics. Moreover, few studies that exist in sub-Saharan Africa are mostly based on cross-country evidence (Mary et al; 2012, Misati 2006) which have tended to capture the effect of the entire financial system on investment. Our study empirically distinguishes the role played by capital market variable on the growth of private investments as a component of total investment controlling for country specific circumstance.
            More importantly, this work is premised on the need to examine the relationship between capital market variables and private investment in Nigeria. We believe therefore, that the outcome of this research will contribute to the field of knowledge. We also underline its importance to policy formulation and implementation for governments at all levels.
            The findings of this research and the recommendations contained therein will form a robust working materials for researchers, government agencies, private institutions as well as academics.
            The study will help the policy maker to draw a conclusion on where to strengthen the effort of capital market in areas of private investment in Nigeria. This work will be a major contribution to existing empirical literature in this area of study.
1.6       Scope and Limitations of the study
            The study shall make use of quarterly data from 1990 to 2010, a total of 64 observations. The study will focus only on private investment and not on the overall gross investment.
The study is also constrained by many factors. One of the factors is the continuing strike by the Academic Staff Union of Universities (ASUU). Finance is another hindering factor that led to the delay of this work. Against all odds, the researcher was able to conclude before the required period.

CHAPTER TWO
REVIEW OF LITERATURE
2.1       Theoretical Literature:
            The literature on investment abounds with the description of the determinates of private investment and channels which such variables affect investment, prominent among these are the traditional neoclassical theory, as formulated by Jorgenson (1963,1971), which postulate the role of cost of capital, the accelerator model which postulated the role of rate of change of output, the Tobin Q theory which argues a role for the value of the firm, the financial repression framework due to Mckimon (1973), shaw (1973) and Onah (2011) and so on. The standard model of business fixed investment is called the neoclassical model of investment (Mankiw, 2003).
            Jorgenson (1983), examines the benefits and cost of firms of owing capital goods. The model shows how the level of investment in addition to the capital stock is added to the marginal product of capital, the investment rate and the tax rules affecting firms. The model shows the economic incentives that lie behind the firm’s investment decision. According to the model, the firm’s decision regarding its capital stock depends on whether owning and renting out capital is profitable. The model holds that the charge in the capital stock called net investment depends on the difference between the marginal product of capital and the cost of capital. If the marginal product of capital exceeds the cost of capital, firms find it profitable to add to their capital stock. If the marginal product of capital falls short of the cost of capital, they let their capital stock shrink.
            There are a number of hypothesis about the speed at which firms plan to adjust their capital stock overtime. We single out the gradual adjustment hypothesis or flexible accelerator model (Dornbush, 1990, Samuelson, 1939, Hicks, 1950, Godwin 1951). The basic notion behind the gradual adjustment hypothesis is that the larger the gap between the existing capital stock and the desired capital stock the more rapid a firm’[s rate of investment. The hypothesis is that the firm plans to close a fraction, l, of the gap between the desired and actual capital stocks each period, denoting the capital stock at the end of the last period by K,. The gap between the desired and actual capital stocks is K*_ K1. The firm plans to add to last periods capital stock (K-1), a fraction (l) of the gap (K*-K-1) so that the actual capital stock at the end of the current period K will be K= K_1+ l (K*_ K_1). This equation states that the firm plans to have the capital stock at the end of the period, K be such that a fraction l of the gap between the desired capital stock, K*, the capital stock, K_1 that existed at the end of the period, is closed.
            To increase the capital stock from K-1 to the level of K indicated by the equation, the firm has to achieve an amount of net investment, 1 = K – K, indicated by the equation. Hence, net investment can be specified as 1=l (K*-K-1) which is the gradual formulation of net investment.
            Many economists (example, Tobin 1982) see a link between fluctuations in investment and fluctuations in the stock market. Stock price tend to be high when firms have many opportunities for profitable investment, since these profit opportunities mean higher future income for share-holders-thus, stock prices according to Tobin reflect the incentives to invest. This is captured in the famous Tobin’s Q definition as,
Q=       Market value of installed capital
Replacement cost of installed capital.
Tobin reasoned that net investment should depend on whether Q is greater or less than 1. If q is greater than 1, then the stock market values installed capital at more than its replacement cost. In this case, managers can raise the market value of their firm’s stock by buying more capital. Conversely, if q is less than 1, the stock market values capital at less than its replacement cost. In this case, managers will not replace capital as it wears out (Mankiw, 1997).
            That financial structure and economic development are interrelated is a well known hypothesis (see Goldsmith, 1969, Mckinnon,, 1973, show, 1973, Kuznets 1971, Cameroon 1967 and Townsend, 2008. see also Gertler, 2010 an excellent survey of the background and Greenwood and Jovanovich, 2010 for a recent contribution).
            In a recent book of Mckinnon (2011), real firms the views he first advocated in his money and capital (1973) that financial liberalization in which real deposit rates are brought to a market clearing level can and indeed does lead to rapid financial deepening measured by the M2 to GDP ratio and financial growth can add, does contribute to higher GNP growth. As for the channels through which financial growth exerts a positive effect on output growth, Mckinnon (1973 and 2011) and others (world Bank, 2012, CBN, 2012), put emphasis on the saving incentives and investment efficiency generated by financial Deepings.
            Overtime, more variables have been observed to affect corporate investment in one way or the other. (Busari and Omoke, 2010). For details on these variables, readers are referred to studies like Greene and Villanueva 91991) Delong and Summers (1991), Chibber, Dailamir and Shatik (1992), serven and Solimano (2009), Bleaney and Greenaway 1993) and Ibara (2006).

2.2       The Capital Market
            Nwankwo (1998), capital market comprises the complex of institution and mechanism through which intermediate term funds and long-term funds are pooled and made available to business, government and individual. There also asserted that the capital market comprises the process by which securities already outstanding are transferred. This expression contains the fact that the capital market has no fixed location and deal on medium and long-term funds, has government, individual and business firms as participants and ensures liquidity at it provides market for both new and old securities.
            Also, the central task of the capital market is the mobilization of funds in the hands of individuals who save pool and channel such funds into productive uses.

2.2.1 Capital Market Instruments
            The instruments can be categorized into three major groups of securities. These are, ordinary shares, preference shares and Debt instruments.
1.         Ordinary Shares
            Herbert (2004), ordinary share are issued to owners of the company. They are long-term financing with a nominal value or face value. The memorandum and article of association of a company specified the number of authorized ordinary shares a company can issue. The ordinary shareholders of the company, their claims to income and assets come after the creditors and preference shareholders have been paid in full. As a result, a shareholder return on investment is less than the return to a lender or preference shareholder. However, there is no limit to the return of ordinary shares.

2.         Preference Shares
            Ukpata (2012), preference shares are major source of long-term financing of a company. The holders of preference shares are entitled to a fixed percentage dividend before any dividend is paid on ordinary shareholders. However, preference dividend can only be paid if sufficient distributable profits are available, although with cumulative preference shares the right to an unpaid dividend is carried forward to later years. The arrears of dividend on cumulative preference shares must be paid before any dividend is paid to ordinary shares. For credibility sake, companies always try to pay the fixed dividend regularly,

3.         Debt Instrument
            Akpeti (2012),  A bond represents a method of long-term borrowing by corporation of government agencies, when a corporate bond is issued, it is a legal contract that goes with it which contains the provision of loans in terms of its amounts, interest and maturity period. Bonds are sold in multiples. They are purchased by commercial banks, insurance companies, pension fund and even individuals. This form of financing is usually reserved for target companies or corporation. This is why they have prior claims on the firm’s asset in the event of liquidating.

2.3       Types of Capital Market
1.         Primary Market
            Soyede (2005), primary market is a market for new securities. It is a platform where the company or government can raise fresh funds for expansion. Both the securities and exchange commission (SEC) and the Nigerian stock exchange (NSE) are involved in primary market activities. The issuing houses and stock brokers also play prominent roles. Until 1993, when deregulation of the capital market commenced, Securities and Exchange Commission was responsible for pricing and allotment of new issues in the Nigerian capital market while the quotation committee of the Nigerian stock exchange approved only issues which is to be listed on the exchange’s official list. The issuing houses and stockbrokers package issues for government and public companies.
            However, the central bank of Nigeria acts as issuing issues for federal government stocks when company wishes to sell such shares. If the company is already listed, the price is technically suspended to forestall any insider. This situation holds true reason for companies going into mergers and acquisition, or re-arrangement that may potentially have bearing on their price and the suspension is sustained by the Nigerian stock exchange until such exercise is completed (Onoh, 2013).
            For companies seeking listing for the first time, the securities are listed with the offer price soon after the offer exercise is completed, instrument representing ownership are dispatched to the shareholders. Securities and Exchange commission was the sole body giving approval to offer price proposed by the issues in conjunction with issuing houses (Emenike, 2012). However, under the present dispensation, the issuing house proposes and defends a price at which it is willing to underwrite the entire securities to be issued. This becomes the offer price and entirely conforms to the price, while SEC examines the offer documents with a view to ascertaining the adequacy of price and conformity with statutory requirements among other things. The Nigerian stock exchange reviews the same documents to ensure that company or institution meets its listing requirements.
            Alice (1997), primary market takes into representation the issuance which could be in form of any of the following
1          Offer for Sale
            Public offers for shares in a company by existing shareholders proceeds of which goes to the vendors for publications. This is a system by which existing shareholders offer their shareholders or part of them for public subscription. In other words, offer for sale is a transfer of ownership of shares from existing shareholders to new shareholders
2.         Offer for Subscription
            This is a direct issue to the public by floating a number of shares of debenture stock. It carries the supposition that the company is a public one and the proceeds of the issues go to the company to finance expansion or/and modernization. Again, the company issues a prospectus inviting the public to its shares and it should be noted that the company cannot dictate who subscribes to its shares.
3.         Stock Exchange introduction
            Where a company seeking quotation already has enough shares held in public hands, the council of stock exchange may permit its security to be introduced into and listed on the market, no new or existing shares to be sold. The added marketability to raise fresh funds in the future invariably at a lower price.
4.         Private Placement
            Securities are sold to the client of the issuing houses handling the issue instead of being offered directly to the general public. This is often necessitated by the desire to save time and cost of issue. The council of the stock exchange seldom grants such permission and this method is utilized by quoted public limited company’s. This differs from offer from the subscription and offer for sale in that it is not an invitation to the public to subscribe, rather, the share or stocks are placed with a broker who then seeks out for the prospective purchasers.
5.         Right Issue
            This involves offer to buy more shares generally made to existing shareholders and at concessionary price. Applications are considered by quotations committee of the exchange for ratification and avoid excruciating interest rate charged in the money market, the approval of the council gives the go ahead for the primary market activities before the commencement of the primary market activities, the securities and exchange commission is given the application to determine the offer price of the security.
ii.         Secondary Market
            Secondary market enhances the new issue market in many ways. It provides the means by which investor can monitor the value of their shares and liquidate them when they wish to do so. Pandey (2006), it is a type of market where existing securities of a market are traded on daily and continuous basis. It is the market for the existing securities. This consists of exchanges and over the counter market where securities are bought and sold after their issuance in the primary market. It has little to do with influencing the way an economy allocates its capital resources or the way in which sailing surplus and savings deficit united with one another.
            However, events in the secondary market frequently provide the basis for the terms and conditions that will prevail in the primary market. If there were no secondary market in which investors could turn investments in new issues back into cash when they choose, many investors would not buy new issues in first place. If any investor truly intend to make any irrevocable commitment of their funds, the availability of a secondary market is an absolute pre-requisite to the existence of a primary market in common stock.
            Hamilton (2012), The secondary augmentation of the flow of funds into the new issue market makes it possible for the economy to make long-term commitment in real capital. This point is best illustrated if the financial claims issued by firms and individuals could not be traded in the secondary market. The secondary market makes it possible for those who desire to make long-term real investments to obtain the money capital of savers who have no intension of committing themselves for long. Thus, they provide the economy with the opportunity to consider entirely new approaches to building its capital stock. Market capitalization is the market value of company’s issued shares capital. It is the product of the current quoted prices of shares and the number of shares outstanding.

2.4       Conditions for Establishing a capital market
Ekiran (2013), the environment of a country plays a major role in the success or failure of a capital market development because if an environment is conducive, it will give room for the rapid growth of a capital market than in an environment that is hostile.
Inoga (2010), described the following as conditions to be considered in establishing a capital market.
1.         Political Environment.
Political environment is considered in establishment of capital market. If there is political stability, it gives the investors confidence that national policies will permit overtime and that this policies will appropriate uneasiness to encourage private savings of both the entrepreneurship and investors. But in an unstable short term view, this causes a volatile market and does not encourage long term planning
2.         Economic Environment
In an economy where market development becomes a priority, government enterprise should not be predominant, otherwise capital market development becomes difficult.
3.         Legal and Regulatory Environment
Regulation is necessary to protect the investors and in process increase their confidence. It is also necessary to ensure a fair and orderly security in the market to achieve these objectives. Company laws must be modernized and the conditions granting the listing to companies seeking quotation must be clear and positive. There must be rules and regulations for the brokers, directors and operators of the stock market. Also, there must be code of conduct for brokers, directors and managers of the stock exchange, stock broking firms and quoted companies.

2.5       Roles of capital market.
The main function of the capital market is to transfer from surplus (savings) sectors to the deficit (capital investment) sector of the economy.
            Mohammed (2011), stated the function of an active market to include the following:
1.         The promotion of rapid formation
2.         The provision of sufficient liquidity for an investor or group of investors.
3.         The mobilization of servings to numerous economic units for economic growth and development
4.         The provision of an alternative growth source of fund other than taxation for government.
5.         The creation of a built in operational and recreational efficiency within the financial system to ensure that resources are optimally utilized at relatively little costs
6.         The encouragement of a more deferent allocation of new investment through the pricing mechanism.
7.         The broadening of the ownership base of asset and the creation of a healthy private sector
8.         Provision of efficient mechanism for the allocation of savings among competing   productive investment projects.
9.         The encouragement of a more efficient allocation of a given amount of tangible wealth through changes in wealth ownership and composition
10.       It is an avenue for effecting payment on debt
11.       It is a necessary liquidity mechanism for investors through a formal debt and equity mechanism.
12.       It is a machinery for mobilizing long term financial resources for industrial development.


2.6       Development in the Nigerian Capital Market.
The finance and insurance sector is the one that has experience about the highest growth on the Nigeria economy especially since after the introduction of the Structural Adjustment Programme (SAP). This has a positive implications on the activities of the capital market in Nigeria.
            The total number of securities transacted in the capital market (both the first and second tier) was 334 in 1961. Of this, government securities were 92, a total of (27.5%) while industries were 242 (72.5%) of the total. In 1965, the total number of transaction increased to 1018 (204.79%) over the 1961 figure. Of this, industrial securities dominated with a percentage share of 61.6%.
            The number of transactions however dropped in 1970 to 643 (47.8%) of which were government securities. Again, the value of total transactions in the year was N16.6 million with government securities accounting almost the total value of (98.78%). Industrial securities through more in number were valued at only N0.2 million. From 1976, industrial share of both in number and value of transactions increased tremendously from 97.0 and 2.03% for 1990 to 97.3 and 3.29% for 1985 and 98.85 and 11.11% respectively in 1987%.
            The sudden growth both in the total number and value of transaction in the market and in the share of industrial securities during these period can be attributed to the positive effect of the Nigerian enterprises promotion decree of 1977 on the development of the private enterprise in Nigeria.
            In 1980’s, the share of government securities in the number and value of transaction fall from 1.44 percent and 92.6 in 1985 to 1.15 and 88.9 percentage respectively in 1987, falling further to 0.39 and 65.13 percent in 1990, 0.10 and 10.4 percent in 1993 and 1995. This development is in line with SAP policy of allowing greater private sector participation in the economy. The trend in the total number and value of securities traded in the capital market over the same period as being erratic which declined in the year 1990, 1993 and the value in 1995. Both the secondary and primary market recorded massive growth in 1996 as a result of the relative calm in industrial environment compared with 1993 and 1994, the repealing of the Nigeria enterprise promotion (NEP) decree and Exchange Countries Act (ECA) of 1962. Another development that aided positive growth in 1995 was the promulgation of the Nigeria investment promotion commission (NIPC) Decree No 16 and the foreign exchange provision decree No 17 of 1995. The stock exchange began its generation on 6th June with 8 securities listed on it. Activities in the year 2001 shows that exchange as 282 securities made up of 19 government stock and bond, 49 industrial loan (debentures) or preferences. Sex companies were listed on this segment of the stock market by 1988 and by 2002 over twenty three companies had availed themselves of the opportunities offered by this market.
            In 1985, there were 20 securities on the exchange official list and increasing to 290 as at the end of April, 2007. Although a small market is one of the heading market in sub Saharan Africa and has made some notable strides in recent years. With a history of over 50 years when the first public issue was floated and 42 years of a stock exchange, equity listings and market capitalization are still relatively small, standing at 196 and US $ 7.0 billion respectively at the end of March, 2003. The value of the equities traded at year end 2002 was US $ 0.5 billion, a much lower than market capitalization. Turnover ratio of 7.9 percent was recorded at the end of 2002, higher than the average turnover ratio for 1998 to 2002.
            The market has been quite active with traded equities of N10.8billion (US $ 86 Million) in January, 2003, which represented about 18 percent of the total equity value in 2002. By the end of March, 2003, N24 billion (US 188.9 Million) equities had been traded. Indeed, the depreciation of the local currency, the naira has continued to impact on the size of the market in dollar terms. Between 1997 and 2002, the naira lost over half its value to dollar, while market capitalization witnessed impressive growth in local currency terms. This was not the case in dollar terms as a much slower growth was registered.
            In 2002, equity market capitalization grew by over N100 billon (US $ 794 million) or 15 percent and has remained on the upward swing. In 2003, equity market capitalization rose by N98.2 billion (US $ 0.8 billion) over December, 2002.
            The movement in market capitalization has been led principally by new listings and firmer prices arising from positive market sentiments. In 2004, the stock index rose by 10.7 percent albeit lower than the price increase of 35.2 percent in 2003 and 54 percent in 2000. Thus, the five years average index growth of 33.3 percent was higher than the growth of inflation which averaged 12.6 percent during the same period.
            The expansion of the capital market is evident in the size of the market capitalization to gross domestic product (GDP). This shows that market capitalization represented 14 percent of (GDP) in 2002, in contrast to 12 percent in 2005, 9.4 percent in 1999 and 5.6 percent in 1992. The rising trend indicates that market capitalization is growing faster in percentage terms than the gross domestic product(GDP). The year 2002 was recorded year for the capital market with total flotation of N61.3billion or US $ 0.483 million, the highest annual record ever posted in the capital market. This single year record surpassed the cumulative figure for the proceeding two years. It is also significant that the total value of flotation in year 2006 represented 36.4 percent of flotation in the ten year ended 2002. the commission actually received 46 new issue applications for N78 billion but only 33 applications had been cleaned and opened by year-end. The 33 flotation’s in 2004 compares favourably with 27 and 21 in 2001 and 2000 respectively. The listings has increased to over 290 securities as at 2007. (See, CBN, 2012, FOS, 2012) for details.                                                                        
2.7       Capital Market Development and Investment.
            In terms of theory, a growing literature argues that stock market provides service that boast economic growth. Specifically, Greenwood and Smith (1996), shows that large stock market can lower the cost of mobilizing savings and thereby facilitating investment in the most productive technologies. Bencivenga, Smith and Stan (2010) and Levnnie (2009), argues that stock market liquidity – the ability to trade equity easily –is important for growth specifically, although many profitable investment require a long-run of capital, savers do not like to relinquish control of their savings for long periods. Liquid markets easy this tension by providing an asset to savers that can quickly and inexpensively sell. Simultaneously, firms has permanent access to capital rise through equity issues.
            Kyle (2010), and Holmstorm and Tirole (2005) argues that liquid stock markets can increase incentives to get information about firms and improve corporate governance.
            Theoretical disagreement exists about the importance of stock markets for economic growth. Mayer (2008), argues that even large stock markets are unimportant sources of corporate finance. Stigliz (1995 and 2011) says that stock market liquidity will not enhance incentives for acquiring information about firms or exerting corporate governance. Moreover, Devereux and Smith (2004), emphasize that greater risk sharing through internationally intergraded stock markets can actually reduce saving rates and show economic growth. Finally, Shleifer and Summers (2008) and Morck, Shleifer and Vishny’s (2000 a, b) analysis suggest that stock market development can hurt economic growth by easing counter productive corporate takeovers.
            In terms of raising capital, Greenwood and Smith (1996) show that large, liquid and efficient stock market can ease savings mobilization. By agglomerating savings, stock markets enlarge the set of feasible investment projects since some worthy projects require large capital injections and some enjoy economics of scale, stock market that easy resource mobilization can boast economic efficiency and accelerate long-run growth. Disagreement exists however, over the importance of stock markets for raising capital. Mayer (2008), for example, argues that new equity issues account for a very small fraction of corporate investment.

2.8 Empirical Literature
            There is now a large body of empirical literature by previous writers to link the role of capital market development in the economy. However, majority of the literatures (Levine and Zervous, 2011, Khan and Senhadj, 2009, Choong, Yusop and Sen 2005 etc) focus on the role of capital market in economic growth. Other studies such as (Lynch 1995, Pelgin and Schich 2006, Bano, 2009 etc) have addressed impact of capital market on investment growth.
Levine and Zervous (2011), empirically evaluate the relationship between stock market development and longtime growth. The data suggests that stock market development is positively associated with economic growth. Moreover, instrumental variables procedures indicate a strong connection between the predetermined component of the stock market development and economic growth in the long-run.
Reiffers (1995), has highlighted the role of factors such as the “accelerator” profit rate, interest rate, taxation and Tobin’s Q in explaining investment in frame between 1972 and 1991 Reiffers analysis was based on co-integrating relationships and error correlation models. The results of the long-run analysis underscores the predominant role of financial variables (profit rate and interest rate). The accelerator variable also has an impact on the rate of capital accumulation, but this impact is unstable. The Chew stability test allowed the researcher to distinguish between three sub-periods (1972-1982, 1983-1987 and 1988-1991). For the first sub-period, it is the accelerator variable that comes first among the explanatory variables of the capital accumulation rate. In second position comes the real investment rate for the second sub-period, which witnessed a soaring of stock market rates, Tobin’s Q ratio is as much an explanatory factor of the capital accumulation rate as are the profit rate and the accelerator variable. As for the results for the third sub-period, which corresponds to the after-kract stock market in 1987, they show that Tobin’s Q no longer has a significant explanatory value, contrary to financial value and the accelerator variable. Reiffers (1995), concludes from this that there was from 1988, a change in investment behaviour, that is, firms no longer considered the increase in their stock market value as a criterion in their investment decision while this criterion had been taken into account in the preceding sub-period.
Levine and Zervous (1996), examine whether there is a strong empirical association between stock market development and long-run economic development. The study used pooled cross-country time series regression of forty-one countries from 1976 to 1993 to evaluate this association. The study focused the line of (Demirgue-Kunte and Levine 1996) by conglomerating measures such as stock market size, liquidity and integration of the world markets into index of stock market development. The growth rate of cross Domestic product (GDP) per capita was regressed on the variety of variables designed to control for initial conditions. Political stability investment in human capital and macro economic conditions, and, then include the conglomerated index of stock market development. The finding was that a strong correlation between overall stock market development and result is consistent with the theories that imply a positive relationship between stock market development and economic growth.
Pedro and Erwan (2004), asserted that financial market development raises output by increasing the capital used in production and by ensuring that capital is put into best uses. Ogwumike and Omole (1996), Ojo (1998), Abdullahi (2005), Adam and Sanni (2005) also asserted the importance of capital market in economic development in Nigeria.
Agarwal (2010) argued that financial sector development facilitates capital market development and in turn raises real growth of the economy. Thorton (2005), Rousseav and Sylva (2010), Calderon and Liu (2010), supported that financial system development promotes economic growth. In the same vein, Beckacrt et al (2005), demonstrated that capital market development increases economic growth. Bolbo et al (2005), indicated that capital market development has contributed to the economic growth of Egypt.
Tharawanji (2007), observed that countries with deeper capital market face less severe business cycle output contraction and lower chances of an economic down turn compared to those with less developed capital market.
Samuel (1996), carried out a comparative study of several models that explain the evolution of firm’s investment expenditure. The estimates in this study were based on data from a panel of 331 American manufacturing firms over the 1972-1990 periods. The results showed that the main determinant of investment was cash flow. Firm managers also paid more attention to the availability of internal sources of funding and to the cost of capital than to the evolution of their firm’s stock market.
Zenfact (2007), studied the investment behaviour of manufacturing firms in Cameroon between 2002 and 2006. The findings revealed a negative influence of uncertainty on investment, a high adjustment speed and a strong-capital profitability elasticity. Demand seems to also have played a decisive role in capital accumulation.
Using a model inspired by Bertola (2008), and a panel of 200 manufacturing firms in Ghana over two years (2004-2005), Paltilo (2009), found that because of demand uncertainty each firm would wait for the marginal productivity of capital to rise beyond a specific threshold before it could invest. The level of this threshold rises as uncertainty increases.
Sen (2000), studied a panel of 30 firms in Senegal over nine years (1988-1994) and found that private investment was mostly influenced by the accelerator phenomenon. Most often, Senegalese firm’s investment depended on demand fluctuations. These firm’s also had a high adjustment speed. In a study of investment behaviour of big firms in Benin. Ghansounou (2001), found that these firms were more influenced by the relative cost of capital and demand variations to which manufacturing firm’s were more sensitive in comparison with commercial firm.
Adjasi and Biekpe (2005), study the effect of stock market development on economic growth in 14 African countries in a dynamic panel data modeling setting. Results largely show a positive relationship between stock market development and economic growth. Further analysis based on the level of economic development and stock market capitalization, are also conducted. The results reveal that the positive influence of stock market development on economic growth is significant for countries classified as upper middle-income economies. On the basis of market capitalization groupings, stock market developments play a significant role in growth only for moderately capitalized markets. The general trend in results shows that low-income African countries and less developed stock markets need to grow more and develop their markets to elicit economic gains from stock markets.
Benhabib and Spiegel (2004), decomposing the well-documented relationship between financial development and growth, examine that financial development affects growth solely through its contribution to growth in primitives or factor accumulation rates or has a positive impact on total factor productivity growth. Their results suggest that indicators of financial development are correlated with both total factor productivity and investment. However, the indicators that are correlated with total factor productivity growth differs from those that encourage investment. In addition, many of the results are sensitive to the inclusion of country fixed effects which may indicate that the financial development indicators are proxying for broader countries characteristics.
 Osinubi (2012), empirically assessed the relationship between stock market development and long-run economic growth in Nigeria for the period of 1990-2010. The study used secondary data while four models of multiple regressions were specified. The regression results which were obtained using the ordinary least square (OLS) shows that the measure of stock market development statistically has no significant effect on economic growth in Nigeria during the periods 1990-2010. The major implication of the findings is that if the Nigerian stock market is significantly contributing to rapid economic growth, policies must be fashioned out to eliminate these factors that blur the effectiveness of the variable or transmission mechanism through which stock market activities influence economic growth. Based on the findings, it was recommended that there should be an improvement in the attractiveness of the market as a major source of raising capital. This will entail improvement in the physical infrastructure, more efficient share transfer and delivering system and provision of adequate and timely information on the market. Also, they should be improvement in the institutional regulation, environment and legal framework such that a balance is maintained between the soundness and safety of the market. Finally, there is the need to internationalize the stock market to improve the flow of savings. This will give the market the advantages of risk diversification, improve information flow and encourage corporate control through investment in equity.
Nieuwer et al (2005), investigated the long-term relationship between economic growth and financial market development, in Belgium. The authors used a near set of stock market development indicators to argue that financial market development substantially affects economic growth. They found strong evidence that stock market development leads to economic growth in Belgium especially in the period between 1973 – 1993.
In Nigeria, some authors have attempted to examine the relationship between stock market development and economic growth. Adam and Sanni (2005), examine the role of stock market on Nigerian economic growth using Granger causality test and regression analysis. The authors discovered on-way causality between GDP growth and market capitalization and a two-way causality between GDP growth and turnover rates. The authors advised that government should encourage the development of the capital market, since it has a positive effect on economic growth.
Obamiro (2010), investigated the roles of the Nigeria stock market in the light of economic growth. The author reported a significant positive effect of  the stock market on economic growth. He suggested that government should create more enabling environment so as to increase the efficiency of stock market to attain higher economic growth.
Ezeoha et al (2009), investigated the nature of the relationship that exists between stock market development and foreign private investment flows in Nigeria that is domestic private and foreign private investment flows in Nigeria. The authors discovered that stock market development promotes domestic private investment flows thus suggesting the enhancement of the economy’s production capacity as well as promotion of the growth of national output. However, result shows that the stock market development has not been able to encourage the flow of foreign private investment in Nigeria.
Nyong (1997), developed an aggregate index of capital market development and used it to determine its relationship with long-run economic growth in Nigeria. The study employed a time series data from 1970 to 1994. Four measures of capital market development, the ratio of market capitalization to GDP (in percentage), the ratio of total value of transactions on the main stock exchange to GDP (in percentage) and listings were used. The four measures were combined into one overall composite index of capital market development using principal composite analysis. A measure of financial market depth (which is the ratio of broad money to stock of money to GDP) was also included as control variable. The result of the study was that capital market development is negatively correlated with long-run growth in Nigeria.
Ted et al (2005), examine the empirical association between stock market development and stock market in India. Whereas the authors found support for the relevance of stock market development to economic development during pre-liberation, they discovered a negative relationship between stock market development and economic development for the post liberalization period.
Ewah et al (2009), appraised the impact of capital                            market efficiency on economic growth in Nigeria using time series data on market capitalization, interest rate, total market transaction, and government stock between 1961-2004 using multiple regression and ordinary least square estimation techniques. The result of the study reveals that the capital market in Nigeria has the potential to induce growth, but it has not contributed meaningfully to the economic growth of Nigeria because of low market capitalization, low absorptive capacity, illiquidity, misappropriation of funds and many others.
CHAPTER THREE
RESEARCH METHODOLOGY
3.1       Model Specification:
            Theoretical framework and model investment functions have been specified using various major theories, particularly, the neoclassical models (Jorgenson, 1967, Tobin, 1969), accelerator models (Koyek, 1954) and the financing theory (Morck, 1990). We shall adopt our model from Misati (2006), the study of impact of capital market on investment growth in sub-saharan Africa in which the financing theory is used to incorporate capital market variables into accelerator model. Though the q-theory has been popularly used to link investment and capital market variables. Thus, assuming constant elasticity of substitution (Q) between capital and the variable inputs, we observe the following relation between desired capital stock (K), the expected level of output(Y) and the expected rental cost of capital (C).
Kt          =          aUtCt             ---------------------------------(1)
∆Kt       =          aUtCt                             ---------------------------------(2)
We then use the conventional capital accumulation identify specified in equation (3) below to define investment(1)
Kt          =          (1-d)Kt           + I1     -------------------------------(3)
Where a refers to depreciation of capital from equation (3), we obtain  Kt-Kt-1  =  It-dKt-I                      -------------------(4)
Re-arranging equation (4), assuming d=D and solving for It yields the following expression.
∆Kt  =  It-1    -------------------------------------------(5)
Substituting (5) into (2) and express the result in log form where lower cases henceforth denote the log form of the variables;
It  =  a+ ∆y               --------------------------------------(6)
Equation (6) represents the basic investment function. To account for slow adjustment of the actual capital stock to the desired capital stock, we nest this within a dynamic regression model yielding the following model
It  =  Plt-1  +  l1∆yt  + l2∆yt-1  + Vt  --------------------(7)
Where the first two terms on the right hand side are lagged investment and output growth rates, respectively. ∆y represents lagged growth rate of capital while Vt captures the individual error components. We proceed to incorporate our capital market variables in the equation below (Pilgril and Schich, 2008, Lynch, 2005, Durham, 2009)
It  =  It-1 + l1∆yt + l2∆yt-1 + l3 capital Mt + aoXt
+ a1Dt + Vt    ---------------------------- (8)
Where capital M represents all the capital market development indicators, that is the size of stock market indicators, two liquidity of the stock market indicators, market capitalization and the vector Xt captures other factors influencing investment in developing countries and Dt is a country specific vector of dummy variables.
            The model incorporates objectives (1) and (2) simultaneously.
3.2.      Methods of Estimation.
            We shall use the method, Ordinary least Squares (OLS) in the model estimation since the study involves a time series. We shall test for the existence of co-integration between private investment and the right hand side of equation (8). Error correction model (ECM) estimations would be used to ascertain the short run impact of capital market variables on the growth of private investment and speed of adjustment of investment towards its long-run equilibrium value.
            In a systematic manner, the main features of an econometric analysis are incorporated in the model specification. This research work will employ ordinary least squares (OLS) estimation because of its reliable traits as the best unbiased estimator. Its error term has a maximum and equal variance. The stochastic term has a zero mean-conditional mean value which is zero and normally distributed.
            The ADL model is a highly statistically significant approach to determine the co-integration relation in an annual data samples for validity (Ghatak and Siddiki 2008). Provisions were made to ensure adherence to the principle of parsimony, dynamism and model stimulation. Provisions were also made to ensure numerical accuracy, data stationary and co-integration elimination if co-integration exist in the model, by the application of Error Correction mechanism (ECM).

3.4       Data Sources
            The data for the study are quarterly data between 1990 to 2010, a period of twenty (20) years. The sources of these data are central Bank of Nigeria, statistical bulletin and Annual Report and statement of account, various years; Stock Exchange Bulletin. The Global Financial Data (www.globalfindata.com), and international financial statistics.


 

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