AN EMPIRICAL ANALYSIS OF THE IMPACT OF CAPITAL MARKET ACTIVITIES ON THE NIGERIAN ECONOMY

CHAPTER ONE

INTRODUCTION

1. BACKGROUNG OF STUDY

The impact of financial sector which comprises of the capital and money market in an economy cannot be over emphasized. It plays a very vital role in the general performance of the economy. It also basically serves as a lubricant that keeps the wheels of the economy turning, as well as affects the political and socio-cultural system of the country.

The financial market can be defined as a medium through which funds are mobilized and transferred efficiently from the surplus to the deficit sectors of the Economy, for productive investment purposes (Nwankwo, 1980). The market basically bridges the savings and the investment gap, as well as stimulates capital formation and economic development (Osamwonyi and Anikamadu, 2002). There are principally two segments of the financial market, which is broadly differentiated by the tenure of funds in each market (SEC, 1998).  The money market which is the first segment is at the short end which involves the provision of funds to those with cash demand and not exceeding the period of one year.  The longer end of the market is called the financial market, and provides long term funds and financial instruments whose maturity period exceed one year.  Numerous empirical studies have appeared in recent years concerning the impact of capital of capital market activities on the economy of a country (Hamilton 1990, Hagerman and Richmond, 1973, Aigbokihien 1995, and Chigue, 2006, to cite only a few).

While many of these studies have provided empirical evidence supporting a significant impact of capital market and stock exchanges on the general economy of a country, there seems to be a few dissenters who have opined that the impact is not significant. Also, many of these studies were carried out in foreign countries with very of them done in under-developed or emergent capital markets like that of Nigeria which is located in sub-Saharan Africa. The purpose of this study is to wade into the controversy and re-investigate using the ordinary least square (OLS) regression technique, to confirm whether the capital market significant affects the Nigerian economy.

1.2     STATEMENT OF THE PROBLEM

The subject matter of the study is an empirical analysis of the impact of capital market activities on the Nigerian economy.

The volume and value of securities traded in the Nigeria Stock Exchange are still relatively low compared to those of the developed economies. However, over the years the volume and values of securities listed have increased, hence the amount of capital available for investment to companies and government has also increased.

The problems therefore arise out of the questions such as:

1. Has the Nigeria capital market been able to raise the required level of capital needed for investment by the public and private sectors of theNigerian economy?
2. Has the Nigeria capital market been able to live up to its expectation both asa source of raising long-term funds and also as a source for investors(shareholders)?
3. Subsequently, to what extent has the market been able to influence economic activities in Nigeria? Since it is an accepted economic dogma that, high savings leads to high investment, which in turn leads to a high level of economic activities in an economy, in other words has the Nigeriancapital market been able to raise optimum funds for the variousinvestment needs?

1.3     OBJECTIVES OF THE STUDY

1. To access how the capital market has performed since its inception to date in Nigeria.
2. To identify the capital market objectives and ascertain how far it has been able to achieve its stated objectives.
3. To identify the listing requirements of the capital market.
4. To examine the instruments traded and the participants in the capital market.
5. Finally, to examine the legal framework and regulatory agencies in the Nigerian capital market.

1.4     HYPOTHESIS OF THE STUDY

1. There is a significant positive relationship between capital market activities and the Nigerian economy.
2. Foreign investment has impact positively on the Nigerian capital market and the Nigerian economy.

1.5     SIGNIFICANCE OF THE STUDY

The importance of capital market as an instrument in raising long-term funds cannot be over-emphasised. Over the years, the Nigeria capital market has been experiencing reasonable growth.A lot of services have been introduce into the market and with the globalisation to the world into one global village and developments information technology, the Nigerian capital market had adapt to the changes enveloping the world. Therefore, there is the need to examine empirically the growth of the market and also to examine the various services offered in this market and its effectiveness. This study is important as it would examine to what extent thecapital market activities has contributed to the economic growth and development.

 In Nigeria, a prospective shareholders and investors would find the research study relevant as it focuses on the Nigeria Stock Exchange where activities of the capital market are usually carried out.

1.6     SCOPE OF THE STUDY

This research shall cover the Nigerian capital markets. It shall also cover all the participants in the capital market. It would cover the geographical domain of Nigeria and would capture activities in the capital market based on activities on the various flows of the Nigerian Stock Exchange. To be able to capture the activities of capital market substantially a period of  21years encompassing January 1990- December 2010 will be considered and will subsequently serve as the time horizon for the study.

1.7     LIMITATIONS OF THE STUDY

In the course of this study, a lot of limitations hindered the realization of an effective analysis. Some of these limitations are:

• Time:  Time served as a constraint or limitation as the research was carried out, with short   time available for the completion of the research work and the specification of the model and information of hypothesis will also take a lot of time.
• Poor data:  Poor data collection is another limitation associated with the state of the economy.
• Financial limitation:  The cost of obtaining relevant materials is high, thereby limiting the depth of the study.

1.8     DEFINITION OF TERMS

Some technical abbreviations, which will be used in this research study are capable of having more than one meaning or interpretation, hence the importance of this subsection arises:

• Acquisition:  The purchase of controlling equity interest in a company by another company. Acquisition may be financed by cash or by issuance of securities.
• Bid:  The maximum price investors are prepared to pay for a security on the stock exchange at a given point in time.
• Call-Over:  A system of trading in some stock exchange where stock brokers assemble at where the list of securities is read aloud.
• Clearing system:  Procedures put in place by a securities exchange to compare trading details between stockbrokers before settlement takes place.
• Equity:  Ownership capital held by individual and corporate. It is called “ORDINARRY SHARE”
• Issue: Securities of a company or government, sold by way of public offer or private placement at a given point in time.
• Over-the-Counter (OTC) Market:  A security market for trading in securities of public companies not listed on a stock exchange. Transactions are essentially conducted among stockbrokers over the telephones.

Rights Issue:  A new issues of securities of a company offered to its existing shareholders in proportion to their holdings.

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