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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