ABSTRACT
This work analyzed the dynamics of stock market development and economic growth in Nigeria from 1984 -2017. The specific objectives were to: determine the impact of stock market size on Nigeria’s economic growth; determine the impact of stock market liquidity on Nigeria’s economic growth; ascertain whether there was existence of long run relationship between stock market development and Nigeria’s economic growth; determine the existence and level of volatility clustering in Nigerian stock market, and determine the degree and direction of causality between stock market development and Nigeria’s economic growth. Variables such as market capitalization, number of listed companies, total value traded, turnover ratio, all share index, banking development, inflation rate, trade openness and real gross domestic product were used in the investigation. Ex-post-facto research design was used for the study which was guided by the five research objectives and hypotheses. The study’s population was the values of stock market indicators from 1961 — 2017, excepting all share index which was 1984 2017; also was the values of macroeconomic variables from 1960 -2017. Time series data covering the period of 1984 2017 were used as the sample size. Autoregressive Distributed Lag model (ARDLM), Exponential Generalized Autoregressive Conditional Heteroscedasticity (1.1) (EGARCH) model and Toda Yamamoto causality test, along with their preliminary and diagnostic tests were employed to test the hypotheses all of which were conducted at0.05 level of significance. For purpose of accuracy in results, E-views statistical package was employed. Among the major findings of the study were that stock market size had positive and significant impact on economic growth. The stock market liquidity had positive but non-significant relationship with the economic growth. There was volatility clustering with explosive persistence and negative asymmetric parameter in the market. The study concluded that the Nigeria stock market is growth inducing; but still relatively underdeveloped and was plagued with volatility, for market indices to exert significant impact on the growth of the economy. Among other recommendations, Security and Exchange Commission should through moral suasion and/or government legislation bring private companies that have met certain financial thresholds to convert to public companies. This is part of the strategy used to get MTN listed on the Exchange, and AIRTEL is also being listed. Other telecommunication companies should be approached. This will increase the number of listed companies and go a long way in broadening and deepening the base of the market to promote growth.
CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND TO THE STUDY
Every economy seeks to create and promote an effective financial system. Financial system comprises of money and capital markets. The capital market consists of stock market, issuing houses, investment advisers, regulators, fund managers, etc. The stock market is the key participant and hallmark of the capital market; hence two of them are often used interchangeably. Principally the stock market lies at the heart of the financial system. Its primary function is to serve as a mechanism for transforming savings into financing for the real sector.
The stock market is viewed as a complex institution with inherent mechanisms through which medium to long term funds of the major sectors of the economy (house-holds, firms and governments) are mobilized and made available to various sectors of the economy (Levine, 2003; Nyong, 1997; Akinde, 2015). It creates a market place where funds can be raised through assets with attractive yields, liquidity and risk characteristics (Bencivenga & Smith, 1991; Akingbohumgbe, 1996). A large proportion of these funds are allocated to firms basically on their rate ofretums.
Stock markets serve important functions in an economy by facilitating savings mobilization, allocation of funds for investment, offering portfolio diversification opportunities, providing liquidity for investors and conveying corporate information (Greenwood & Smith,1996; Levine & Zervous, 1998; Sharp & Bailley, 1999; Rousseau & Wachtel, 2000; Beck & Levine, 2003; Paudel, 2005 cited in Shahbaz, Ahmed, & Ali, 2008; Akinde, 2015).
Further, stock markets also serve these critical purposes: they encourage broader ownership of productive assets by small savers and hence enable them to benefit from economic growth and wealth distribution. They improve competitiveness of domestic companies and enhance their ability to compete globally. They also attract foreign portfolio investments which are critical in supplementing the domestic saving levels.
Additionally, through the provision of equity capital, the stock markets enable companies to avoid over-reliance on debt financing, thus improving corporate debt-to-equity ratio (Yartey & Adjasi, 2007; Olusegun, 2011). They help in diffusing stresses on the banking system by matching long-term investments with long term capital. Further governments go to the markets to borrow for their infrastructural developments. In most developing countries however, according to Olusegun (2011), stock markets have fallen short of expectations in spite of their great potentials for financing development. As a result, these countries have resorted to external borrowing that has brought them excruciating foreign debt problems.
A stock market undergoes different stages of development that bring improvements in its functioning. Stock market development implies increasing or improving a stock market’s ability to satisfy an economy’s needs as stipulated among the main functions of stock markets. The development of stock markets provides opportunities for greater funds mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal (Levine & Zervous, 1996; Inanga & Emenuga, 1997; Ifeoluwa &
Motilewa,2015).
The level of stock market development is reflected in the quality of services provided by the stock market. According to Okonkwo, Ogwuru, and Ajudua (2014), the primary measure to assessing the expansion of a stock market is to look at changes in its dimension. El Wassal (2013) corroborates by stating that there is no single criterion that could be used to measure stock market development, there are set of indicators needed to capture the main aspects of the development, namely; stock market size, stock market liquidity, stock market volatility, stock market concentration and stock market linkage to real sector performance. Using these varieties of indicators could provide a more robust, dynamic and accurate depiction of stock market development as it is a complex and multi-faceted concept and no single measure of indicator can capture all these aspects of development.
The development of a stock market is primarily a private sector activity (El- wassal, 2015). This notwithstanding, it must be noted that the supporting role of the government is crucial for a market to develop.
Mckinnon (1973) and Goldsmith (1969) have suggested that there is a linkage between the stock market development and economic growth. Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. In simplest form, it refers to an increase in aggregate productivity. Higher economic growth is positively associated with and can be translated to an increased quality of life or standard of living. According to Onwuemere, Imo, Okafor, and Ugwuanyi (2012), one of the
major ways to generate economic growth is to create capital goods and increase productivity. The rate of capital growth is highly dependent on the rate of savings and investments.
A good number of studies like Beck, Levine, and Loayza (2000), Riman, Esso, and Eyo (2008), Dafarighe (2009), and Donwa and Odia (2010) state that stock markets play a crucial role in economic growth. It is regarded as a necessary tool for economic growth and development as it provides listed companies the platform to mobilize much needed capital for long- term investments. This idea that stock market development promotes economic growth dates back to the works of Bagehot (1873) and Schumpter (1912) both cited in El• wassal (2013). This link between stock markets and economic growth pivots on a major strand of finance- growth hypothesis (Schumpter, 1912; Mckinnon, 1973; Ifeoluwa & Motilewa, 2015) with an insight into how finance intermediation facilitates economic growth. Corroborating, Levine and Zervous (1996), Khan (2000), and Caporale, Howells and Soliman(2004) assert that the finance intermediation comes through a number of channels, savings mobilization, funds allocation, liquidity and risk diversification. Through these channels economic growth is engendered. For instance, savings mobilization may increase the rate of saving and if stock markets allocate savings to investment projects yielding higher returns, the increasing rate of return to savers will further make savings more attractive. Consequently, more savings will be channeled into the corporate sector for investments bringing about economic growth.
However, there is the other side of the argument stating that the link between stock market development and economic growth centers on growth-finance hypothesis. The early proponents of this approach were Robinson (1952), Lucas (1988) and Chandavakar (1992). Others were Gurley and Shaw (1960), Gelb (1989) and Singh (1997). They all cast doubt on the importance of stock market for economic growth. They argue that it is economic growth that accelerates development of stock market through the increasing demand for financial instruments which expedite stock market development. Yet another side of the argument could not specifically establish any link (Summer, 1988; Mayer, 1988; Mazur & Alexander, 2001 ). They contend that even large stock markets are unimportant sources of corporate finance. The debate is on-going with contemporary scholars taking diverse positions.
In Nigeria, the stock market is represented by Nigerian Stock Exchange (NSE). The NSE is the center-point and hallmark of Nigerian Stock Market. It provides a mechanism to mobilize private and public savings as well as making such funds available for productive purposes
The NSE was established as Lagos Stock Exchange in 1960. It started operations in 1961. In
1977, it was renamed Nigerian Stock Exchange with branches established in some major commercial cities of the country.
The Nigerian Stock Exchange has been undergoing some positive changes smce its establishment. The changes, according to Soyode (1990), became remarkable with the introduction of the Structural Adjustment Programme (SAP) which resulted in the deregulation of the financial sector and the privatization exercise that exposed investors and companies to the significance of the stock market. Further, there have been numerous infrastructural developments in the market. Amongst them are: introduction of the automated trading system (ATS); linking up the market with the Reuters Electronic Contributor System for online global dissemination of the market information; launching of the market’s internet system (CAPNET), and the introduction of Central Securities Clearing System (CSCS) as part of the infrastructural supports for meeting the challenges of internationalization and achieving enhanced service delivery. Unfortunately, prima facie all these have not yielded positive impact on Nigeria’s economy. The listing requirements are still stringent and expensive. And the market still suffers from capital flows arising from volatility in foreign portfolio investments.
1.2 STATEMENT OF THE PROBLEM
The Nigerian stock market is full of uncertainty and instability, causing large financial losses and confidence crisis among the investors. Within the period under review (particularly between 1997 and 2017), it had shed trillions of Naira intermittently. Further, the market appears isolated from the Nigerian macro-economy as it is not playing its signaling function. This is suggestive of a disconnection between the market and the Nigerian economic performance. Perhaps the market has not yet developed to be able to influence the economy. Another important concern is the lack of consensus among scholars on the nature of relationship existing between stock markets and economic growth. The ongoing conflicting positions are clear evidence that earlier studies conducted may not have been enough to produce a definite answer. In the light of the foregoing, this work becomes compelling to seek answers to a number of questions.
Levine & Zervous (1996), and Obadan (1998) posit that stock market should serve as a dependable guide in the measurement of changes in the level of economic activities.
According to them, stock market should serve as signal to economic changes. In other words, when stock market experiences growth, it is supposed to spur economic growth. According to Akinde (2015), in many countries of the world, the stock market plays invaluable roles in economic growth. Stock market has been identified as an institution that contributes to the economic growth of both emerging and developed economies. This is achieved by being a conduit for channeling resources to institutions that have need of funds. Theorists have maintained that the trend of stock market performance indices contribute to national economic growth (Schumpeter, 1932 and Goldsmith, 1969 as cited in Murtala, Suraya, & Zunaidah, 2015; Levine & Zervous, 1996; Greenwood & Smith, 1997; Boca, 2011). Also empirically, a large body of studies clearly show that stock market development is strongly and positively connected with the level of economic growth (Guglielimo, Peter, &Alan,2003; Ogunleye & Adeyemi, 2015). There is, therefore, some evidence that the stock market at its efficient level remains an important contributor to economic growth.
The Nigerian stock market has no doubt witnessed some relative stability and also recorded some reasonable growth over the years, particularly since the deregulation and various privatization exercises (Soyode, 1990; Okodua & Ewetan, 2013; Ogunleye & Adeyemi,
2015). The growth is evident in many aspects: for example, the increasing number of capital market instruments traded on the exchange, market capitalization and market index. In addition, the internationalization of the market and improvement in the infrastructural facilities in the market in line with what obtains in the developed nations such as automated and internet transactions has enabled the market to benefit from the current economic globalization (Murtala, Suraya, & Zunaidah, 2015). All these have facilitated increase of
public interest in the market (Olusegun, Oluwatoyin, & Fagbeminiyi, 2011). Evidently, with
these developments the NSE is positioned to positively impact on the economy. According to El- Wassal (2005), such observed phenomenal growth of emerging markets has been considered as a significant development to trigger process in the concerned economies. However, this remains to be satisfactorily verified.
These developments notwithstanding, there have been cases of corruption/market infractions and corporate governance issues in the market. According to Onyeama (2013) and Oteh (2014), these impinge on investors’ confidence and the general economic growth. Further, and very important, the market is heavily dominated by very few companies. This distorts the signaling function of stock markets. Again, issues of macro-economic instability particularly
high inflation rate in the system and uncertainty in the political space like ethnic unrest and insecurity can pose some constraints on the market to bring about economic growth.
1.3 OBJECTIVES OF THE STUDY
The broad objective of this study was to analyze the dynamics of stock market development and economic growth in Nigeria between 1984 and 2017. The specific objectives were:
1. To determine the impact of stock market size on Nigeria’s economic growth.
2. To determine the impact of stock market liquidity on Nigeria’s economic growth.
3. To determine whether there is a long- run relationship between stock market development and Nigeria’s economic growth.
4. To determine the existence and degree of volatility clustering in Nigerian stock market.
5. To determine the nature of causality between stock market development and Nigeria’s economic growth.
1.4 RESEARCH QUESTIONS
The following research questions became necessary in order to address the objectives:
1. To what direction and degree did stock market size impact on Nigeria’s economic growth?
2. To what direction and degree did stock market liquidity impact on Nigeria’s economic growth?
3. To what direction and degree was there long run relationship between stock market development and Nigeria’s economic growth?
4. To what degree was there volatility clustering in Nigerian stock market?
5. To what degree and direction was there causality between stock market development and
Nigeria’s economic growth?
1.5 HYPOTHESES OF THE STUDY
The hypotheses for this study are stated in their null forms as follows:
1. Stock market size did not have positive and significant impact on Nigeria’s economic growth.
2. Stock market liquidity did not have positive and significant impact on Nigeria’s economic growth.
3. Stock market development did not have long-run relationship with Nigeria’s economic growth.
4. There was no volatility clustering in Nigerian stock market.
5. There was no causal relationship between stock market development and Nigeria’s economic growth.
1.6 SCOPE OF THE STUDY
In this study, the focus was on stock market development and economic growth. The time frame of the study covered thirty four years from the year 1984 to 2017. The choice of the base year, 1984, was informed by the fact that it was the first full year of operation of the NSE all-share index (ASI), which is one of the variables of the study. The exchange maintains an ASI formulated on 3″ January, 1984 at 100 basis points. For the currency of the study, 2017 was chosen and to the best of the researcher’s knowledge, 2017 is the most current year that has an official published dataset. It is the researcher’s belief that 2017 is current enough as to make the work significant and useful for valid decision making.
The geographical scope is Nigeria while variables of interest are stock market and Nigerian economy. As regards to content scope, the research work covered almost all the activities of the major indicators of Nigerian stock market. Further the work reflected the dynamism of Nigerian stock market as it captured the bubbles and the bursts that characterized the period of the study. The period witnessed among others the global financial crises from 2007 to 2009.
1.7 SIGNIFICANCE OF THE STUDY
This study may be of immense benefit to the following groups:
Policy Makers
Investors in developed markets are increasingly becoming convinced of the economic opportunities in investing in emerging markets. There are many possible emerging markets among which investors can choose. It therefore becomes essential that sound and practical policies are developed so as to ensure that Nigeria benefits from the tide of capital inflows, rather than misses out.
The study will help the policy makers to determine what polices that can be formulated, what regulatory acts that are needed and the necessity of amendments regarding the rules and regulations to develop the market and make it better functioning so as to contribute to the economy. It is expected to give poliey directions to the relevant government agencies regarding market transaction costs, listing requirements and market diversification.
With the empirical evidence of this study, better policies could be drawn and implemented by both the government and regulator to position the market for a significant contribution to the economy.
Investors
Both local and foreign investors would benefit maximally from the study. It would increase their knowledge of the dynamism of the market. They would like to know the profitability of their investments and the efficiency level of the market where they want to invest their funds. For example, through stock prices they could gain better understanding of the company performances more accurately.
Academia
This study is intended to contribute to the existing theoretical and empirical literature in stock market and economic growth. Specifically, it aimed at analyzing the dynamics of stock market and the economic growth in Nigeria. It incorporated variables lacking in previous studies and therefore would help to provide more clarity on the relationship between the two major variables of interest. It is hoped that the findings of this study would serve as a secondary source of information for future related studies.
General Public
The result of this study would be of immense benefit to the general public. Majority of uninformed investors, particularly individual investors who are ignorant of the workings of the market would be educated and guided. It would provide the needed awareness among them for greater patronage of the market. It is the desire of every adult to own a financial investment to depend on during the rainy day.
Business Organizations
This work would be beneficial to business organizations, manufacturing compames and financial institutions (insurance companies, banks, etc.). The recommendations of the study if implemented would help stimulate investments in the market and this would largely benefit the business organizations as their floatation would be sufficiently subscribed.
Nigerian Economy
The entire economy will benefit in terms of productivity, job creation, economic growth and development.
1.8 LIMITATIONS OF THE STUDY
Our study has some limitations within which our findings need to be interpreted carefully. The limitations include:
Data unavailability: This work would have also conducted test on the impact of market concentration on Nigeria’s economic growth, but some of the annual series on traded shares of the four most capitalized companies which dominated the market were not available for the study period. All of them, with the exception of Nestle Plc. have not been long in the Nigerian stock exchange so as to build up a good sample size for robust analyses. For example, Dangote Plc. which as at February, 2019 had the largest market capitalization with
28.55% just got listed in October 2010, whereas GTBank and Zennith were listed in 2004.
The four companies accounted for 54% of market capitalization as at February 2019.
The option of obtaining high frequency series like monthly data (from the four companies) to be able to achieve a good sample size was extremely difficult. The inclusion of market concentration in the study could have provided a more robust, dynamic and accurate depiction of stock market development.
Further, this study would have employed a multivariate model that would include exchange rate and inflation rate (as control variables) for volatility test. However, their monthly data were incomplete (particularly, inflation rate) for the sample period. We place premium on monthly and daily series for volatility test because it needs high frequency observations to prevent smoothing off the swings.
Additionally, findings of this study may not be completely generalized because the sample size was restricted to thirty four years which is just relatively large, (ASI came into full operation in 1984). Sample size statistical tests normally require a large sample size to ensure more precise results. The larger the sample size, the more universal the results. Employing larger samples size could have produced sweeping results.
This material content is developed to serve as a GUIDE for students to conduct academic research
ANALYZING THE DYNAMICS OF STOCK MARKE T DEVELOPMENT AND ECONOMIC GROWTH IN NIGERIA: 1984-2017
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