AN ANALYSIS OF THE IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
The mobilization of resources for national development has long been the crucial focus of development economists. This is because, for sustainable growth and development to take place, funds must be effectively mobilized and allocated to enable business and the economy harnesses their human, material and managerial resources for optimal output. It is against this background that every country has a financial system which serves as a mechanism for the mobilization of resources for the attainment of economic growth. Consequently, the more developed the financial system of an economy is, the more efficient it is likely to be in the mobilization and allocation of resources for development purposes.
The financial system of any society is the framework within which capital formation takes place. According to Odife (1994), it is the framework within which the savings of some members of the society are made available to other members of the society. Put differently, it is the arrangement or mechanism by which the savings surplus units of the economy transfer their resources to the borrowing deficit units for the purpose of enhancing economic growth (Okereke – Onyiuke, 2009). The financial system is made up of two major markets. These are the money market and the capital market. According to Elakama (2009), the two markets are at the heart of the financial system. The money market is a type of market where short term funds and securities such as treasury bills, inter-bank deposits, Banker’s acceptance, certificate of deposits etc whose tenor are usually shorter than or equal to a year are bought and sold. In other words, it is a market where short term capital is sourced. The capital market on the other hand is a type of market where long term debt instruments whose tenor exceeds a year are traded.
According to Sulaiman (1999), it is a network of interrelated institutions governed by operational guidelines, which permit the sale of equity and long term debt. Furthermore, Al-Faki (2006) describes the capital market as a network of specialized financial institutions, series of mechanism, processes and infrastructure that, in various ways, facilitate the bringing together of suppliers of medium to long term capital for investment in socio-economic development projects. Instruments traded in the capital market include equities, debts, government bonds, corporate bonds, preference shares, debentures, rights etc. Within the broad classification of the capital market is the stock market, which operates as the rallying point for the overall activities in the capital market. According to Alile and Anao (1984), the stock market is the pivot around which every activity in the capital market revolves. Its follows therefore that without the facilities provided by the stock market, it is doubtful if the capital market can efficiently perform its expected role of resource mobilization (Ologunde, Elumilade and Asaolu, 2006). It is in the light of the above that the stock market is considered a vital element in the mobilization and allocation of resources in any modern economy. Until now, the literature has mainly focus on the role of financial intermediation in the process of economic growth and capital accumulation. Indeed, many studies have analyzed the channels through which banks and other financial intermediaries may help to increase, for example, the savings rate or the average productivity of capital and, in turn growth.
1.2 STATEMENT OF RESEARCH PROBLEM
The role of a developed stock market in the development of any economy cannot be over emphasized in view of its potentials and likely impact on the economy if well harnessed. It is a known fact that nations cannot develop without the needed long term funds for development projects, and the more developed a stock market is, the higher the potential for sourcing long term fund for industrialization. Indeed, as pointed out by Osinubi, a well functioning stock market serves a veritable tool in the mobilization and allocation of resources needed to meet the rapid expansion of the economy as it develops.
In recognition of the above, the research questions for this study are:
i. Has the growth of the Nigerian Stock Market promote economic growth in Nigeria?
ii. Has the market acted as a mechanism for attracting foreign capital inflow?
iii. How has the market facilitate the mobilization of long term fund for financing long term development project?
1.3 OBJECTIVES OF THE STUDY
The stock market is a common feature of a modern economy and it is reputed to perform some functions that promote the growth and development of the economy. Given the above, this study is therefore carried out primarily to empirically ascertain the impact of the Nigerian Stock Market on economic growth. Specifically, the objectives are:
i. To identify the channels through which the stock market impacts on economic growth;
ii. To examine the establishment of the Nigerian Stock Market, as well as its performance and growth;
iii. To identify the performance/growth drivers of the Nigerian stock market;
iv. To identify the challenges facing the Nigerian Stock market and examine various ways of boosting its performance and growth.
1.4 HYPOTHESES OF THE STUDY
A research hypothesis is a scientific statement expressing the relationship between two or more variables which is meant to be tested. In the light of the primary objective of this study, the following hypotheses have been formulated
1. Ho: The development of the Nigerian Stock Exchange is not positively associated with economic growth in Nigeria.
2. H1: The development of the Nigerian Stock Exchange is positively associated with economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The significance of an efficient and well functioning stock market in spurring economic growth has been well emphasized in the literature. Therefore, a constructive and objective study of the stock market which aims at highlighting its role in the process of capital formation and national development will be of great importance both to individual investors, firms and policy makers. As a market place where securities (Stocks, bonds, shares) are bought and sold openly with relative ease, the stock exchange is very important to investors. Hence, prospective share holders and investors would find the work relevant as the research study focuses on the Nigerian Stock Exchange where activities of the capital market are usually carried out. Furthermore, since the stock market is a reliable means through which firms can source for low equity capital, as well as the fact that the prices of the stocks of firms quoted on the stock exchange serves as an indication of the overall performance of the firm, this research study will also be of great significance to firms. Additionally, this research will be relevant to the government as it will enable it have a better knowledge of the policies necessary to enhance or improve the contribution of the stock market to the economy.
This research work will also serve as a reference for subsequent write-ups and stimulate further in-depth and insightful study in this area of study.
1.6 SCOPE OF THE STUDY
In view of its primary objective, this study focuses mainly on the activities of the Nigerian Stock Market without detailed reference to other markets in the capital market. The study covers activities of the Nigerian stock market for a period of 28 years, from 1981 to 2008. The choice of this period is anchored on the fact that it covers both the relatively small and high activities performance of the market.
1.7 LIMITATIONS OF THE STUDY
This research was limited by certain constraints which include difficulty in sourcing data from certain relevant organization, non availability of data on certain variables, restrictions on accessing certain materials on the internet and insufficient financial resources for the study. Lastly, this study was also constrained by inadequate time on the part of the researcher, since attention had to be given to other course work.
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