THE RELATIONSHIP BETWEEN MARKET VARIABLES AND PRIVATE INVESTMENT IN NIGERIA



CHAPTER ONE
INTRODUCTION
Background of the Study
            It is a known fact that investment promotes economic growth and development requires long- term funding for longer than the duration for which most savers are willing to commit their funds. Capital maker 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 form 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 to gross atomistic 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 variedly of financial intendments that enable economic agents to pool, price and exchange rise. in this market, leaders (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 prim any 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 savages and real investment in any healthy economic environment. through the market, aggregate savings are channeled into real investment the increases the capital stock and economic growth of the country. Moreso, the capital market synchronize the divergent preferences for portfolio manger and financial institutions and those of savers by mobilizing long term funds for portfolio inanagers and financial institutions while providing avenues for savers to invest when the need arises through the secondary market without effecting the operation of the firm, their saving 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 600,00 (more than 300,000 pounds sterling) worth of government stock and 53 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 programmer (SAP) which influenced the economic policies of the Nigerian government and Ted to reforms in the late 198Ds and early 199Ds. the progamme was proposed as an economic package to rapidly and effecting
            however, the furnover 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, the figure excepting for 2011 is an improvement, evidencing the continued rise in activities of the market. According to  CBN (2011), the market has been guide 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 vatue in 2008.
            The depreciation of the currency, the nava has continued to impact on the size of the market in dollars terms. between 1997 and 2002, the naira lost over halt 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 Benn a popular source of funds because of the instability in the economy low yields to investors in capital market instrument and government overbearing presence in economic markets. The introduction of 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 get 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; 2013). 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 in use. in 2003 alone, the market considered and approved 26 applications for new issues valued at N185.0 billion, as against 27 application 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 N294,104,4, 956.9 in 1999 and by 2005, it had risen to N1324, 89.7 (CBN, 2006). In 2010, there was a clear indication that s long- run prelateship 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 result In the significant growth of the financial sector. for example, the recapitalization to meet the minimum capital requirement of N26 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 investment 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 that 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 objectives 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 market 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 of the study
            Our study shall make use 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.

CHAPTER TWO
REVIEW OF LITERATURE
2.1       Theoretical Literature:
            The literature on investment abounds with the description of the determinants of private investment and channels which such variables affect investment. Prominent amongst 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 son.
            The standard model of business fixed investment is called the neoclassical model of investment (Markiw, 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 interest rate and the tax rules affecting firms. The model shows the economic inactive 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. 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 falls short of the cost of capital, they let their capital shock shrink.
There are a number of hypothesis about the speed at which firms plan to adjust their capital stock over time, we single out the gradual adjustment hypothesis or flexible accelerator model (Dornbush, 1990, Samuelson, 1939, Hic 43, 1950, Godwin 1951 etc). 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 traction, of the gap between the desired and actual capital stocks each period, denoting the capital................

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