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
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 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 Mikimon (1973), show (1973)
and Onah (2011) and so on.
The standard model of business fixed
investment is called the neoclassical model of investment (Makkiw, 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 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
mode, 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 adjustment hypothesis or over time, we
single out the gradual adjustment hypothesis or flexible accelerator model
(Dornbush, 1990, Samuelson, 1939, Hicks, 1950, Godwin 1951). The basic nation
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 be
K,. the gap between the desired and actual capital stocks is K*- K1. the firm
plans to ad 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 state that the
firm plans to have the capital stock of 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 198)
see a link between fluctuations 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 at more than its replacement lost. In this case, managers
can raise the market value of their firm’s stock by buying more capital. Conversely,
if is less than 1, the stock market values capital at less its replacement
cost. In this case, managers will not replace capital as it wears out (Mankiw,
1997).
That financial structure and
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 efficient 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 Green and Villanueva 91991) Delong and Summers (1991), Chibber, Dailamir
and Shatik (1992), serven and Solimano (2009), Bleaney and Greenway 91993) 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 poled 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 toward 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 why they have prior claims on the
firm’s asset in the event of liquidating.
2.3 Types
of Capital Market
1. Primary
Market
Sopede (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 activities. The issuing houses and stock brokers also
play prominent roles. Until 1993, when deregulation of the capital market
commenced, Sec 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 listed on the exchange’s official
list. The issuing hones 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 reamangement 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
hones (Ebewke 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 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 go to the vendors. 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 holders to new holders
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 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 unit Leal 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 bank 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 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 roill 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 establishinment of capital market. If there is
political stability, it gives the investors confidence that national policies
will permit overtime and that this policies will appro priate uneasiness to
encourage private savings of both the entrepreneurship and investors. But in an
unstable short term view, this causes a volatile market and dose 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 secking 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 mangers of the stock exchange, stock broking firms and quoted companies.
2.5 Role 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, 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 a mount of tangible wealth through changes in wealth
ownership and composition
10. It is an are for effecting payment on
debt
11. it is a necessary liquidity mechanism for
investors through a formal debt and equity mechanism.
12. It is 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 had 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 while industries were 342 (72.5%)
of the total. In 1965, the total number of transaction increased to 1018
(2004.79%) 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 (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 2.33% for 1990 to 97.3 and 3.29% for 1985 and 98.85 and 11.11%
respectively in 198%.
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
Nigeria.
In 1980’s the share of government
securities 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 with decline in number 1990 and 1993 and the value in
1985. both the secondary and primary market recorded massive growth in 1995 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 promwgation 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
(debentues) 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 bee 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 impressive movement in market
capitalization has been led principally by new listings and firmer prices
arising from positives 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 impressive expansion of the
capital market is evident in the six 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 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 last 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 pened 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 markets provides service that
boast economic growth. Specifically, Greenwood and smith (1996) show that large
stock market can lower the cost of mobilizing savings and thereby facilitating
investment i9n the most productive technologies. Bencivenga, smith and stan
(2010) and Levnnie (2009), argue 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
have permanent access to capital rise through equity issues.
Kyle (2010) and Holmstorm and
Toirole (2005) argues that liquid stock markets can increase incentives to get
information about firms and improve corporate governance.
Theoretical disagreement exists
however about the importance of stock markets for economic growth. Mater
(2008), argues that even large stock markets are unimportant sources of
corporate finance. Stigliz (1995,2011) says that stock market liquidity will
not eahance incentives for acquiring information about firms or exerting
corporate governance. Moreover, Devereux or and Smith (20040, emphasize that
greater risk sharing through internationally intergraded stock markets can
actually reduce saving rates and show economic growth. Finally, Shleifer and
Summers 92008) and morck, shleifer and market development can hurt economic
growth by easing counter productive corporate take overs.
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 ionvestment 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 Zerzous, 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, pebjin and Schich 2006, Bano, 2009
etc) have addressed impact of capital market on investment growth.
Levine and zerzous (2011), empirically evaluate the
relationship between stock market development and longtime growth. The data
suggest that stock market development is positively associate 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 “acceleration” 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 accderator 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
finanicial value and the accelerator variable. Reiffers (1995), includes from
this 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 poled cross-country time series regression of forty-one
countries from 1976 to 19993 to evaluate this association. The study food the
line of (Dominguez-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
capital was regressed on the verity 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), Adamand Sanni (2005) also asserted the importance of capital
market in economic development in Nigeria.
Agarwal (2010) argned that financial sector
development facilitates capital market development and in turn raises real
growth of the economy. Thorton (2005) Rousseav and 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 sever 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 (200), studies a panel of 30 firms in Senegal over
nine years (188-1994) 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 /4 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 growth 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
whether financial development affects growth solely through itrs contribution
to growth in primitives or factor accumulation rates or whether it 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 differ 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 (20120,
empirically assessed the relationship between stock market development and long-run
economic growth in Nigeria for the period 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 (OL3) shopw that measures of stock market development statistically
have no significant effect on economic growth in Nigeria during the period
1990-2010. the major implication of the findings is that if the Nigerian stock
market is to significantly contribute 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 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, move efficient share transfer and delivering
system and provision of adequate and timely information on the market. Also there
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. And 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 author discovered on-way
casualty between GDP growth and market capitalization and a two-way causality
between GDP growth and turnover gates. The author advised that government
should encourage the development of the capital market. Since it has a positive
effect on economic growth.
Obamiro (2010), investigated the role of the Nigeria stock
market in the light of economic growth. The author reported that a significant positive
effect of 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 ie domestic private and foreign private investment
flows in Nigeria. The authors discovered that stock market development promotes
domestic private invest flows thus suggesting the enhancement of the economy’s production
capacity as well as promotion of the growth of national output. However,
results show 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 and significantly 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 squares 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, among others.