IMPACT OF FINANCIAL LIBERALIZATION ON THE EFFICIENCY OF THE NIGERIAN STOCK MARKET 1986-2011

ABSTRACT

Using Nigeria aggregate level data for 26 years: 1986-2011, the study estimates the impact of financial liberalization on stock market efficiency in Nigeria. The study used the Generalised Least Square (GLS) to estimate the four hypotheses formulated for the study. The ratio of stock market capitalization to gross domestic product, ratio value of shares traded to gross domestic product, ratio of all share index to gross domestic product, and ratio of value of shares traded to market capitalization were adopted as the dependent variables, while the independent variable was financial liberalization (percentage in foreign equity ownership). The study also controlled for some macroeconomic variables such as exchange rate, inflation rate and interest rate that might impact on the dependent variables. The results showed that the regression coefficient for financial liberalization was negative and non-significant in predicting or promoting four proxies of stock market efficiency, which supports the preposition that financial liberalization does not transform or promote stock market efficiency. Based on the results, the study recommends inter alia: promotion of favourable macroeconomic environment; formulation of policies that will reduce the impact of speculative hot money, strengthening of the legal system, stronger transparency in terms of information disclosure, the need for the establishment of effective and efficient Dispute Resolution Mechanism, the urgent need to rethink the tenure of the market; among others.

1.1 Background of the Study

CHAPTER ONE

INTRODUCTION

The issue of market efficiency, as espoused by Fama (1965, 1970), which posits that prices fully reflect available information has remained at the heart of financial economics literature. Lim and Brooks (2011), state that the efficient market hypothesis defines an efficient market as one in which new information is quickly and correctly reflected in its current security price. Generally, the argument is based on the assumption that at any given time, prices of stocks fully reflect all the available information related to them. This is the path toed by Marashdeh and Shrestha (2008), Maghyereh (2003), Bashir, Ilyas and Furrukh (2011), among others.

For the market to be efficient, the prices of stock must reflect company fundamentals, state of the economy and most importantly, the law of demand and supply, which can only come to fruition through  liberalising  the  stock  market  (Kawakatsu  and  Morey,  1999;  Waliullah,  2010). Proponents of this theory have documented extensive evidence to show that financial liberalization promotes stock market development (Ortiz, Cabello and Jesus, 2007). Against this background, the effects of financial liberalization on stock market efficiency has remained a core issue in finance literature, more so, considering efforts by governments especially in the developing countries to liberalize their financial markets in order to catch up with the developed countries on one hand and to integrate their economies to the global economy on the other. The impact of financial liberalization on the stock returns and volatility is an important issue for researchers, regulators and investors (Nazir, Khalid, Shakil and Ali, 2010).

An illustrative list of studies of the effects of financial liberalization on stock market efficiency includes those by Henry (2000) who found that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents; Kim and Singal (2000)  found that  stock returns increase immediately after market opening without a concomitant increase in volatility; Bekaert, Harvey and Lundblad (2003) report that integration affects the functioning of the equity market, the cost of capital, the diversification ability  of local participants, the  level of prices,  the  business  focus of local companies, and foreign capital flows while the empirical findings of Levine and Zervos (1998) show that stock markets tend to become larger, more liquid, more volatile, and more integrated

following liberalization and Grabel (1995) states  that financial liberalization induces increased asset price volatility. On his part, Miles (2002) reports that reforms has a statistically significant impact in almost three fifths of the emerging markets surveyed, but more often than not, the effect is actually to raise, rather than lower the volatility of stock returns. In this connection, therefore, the highly articulated view of Levine (2001) which states that international financial integration can promote economic development by encouraging improvements in the domestic financial system is worth noting.

Specifically, Bekaert and Harvey (1995) explain that markets are completely integrated if assets with the same risk have identical expected returns irrespective of the market. A prominent line of research  suggests  that  financial  development  has  a  causal  influence  on  economic  growth (Ujunwa and Salami, 2010). However, Stigliz (2004) in his criticism of the International Monetary Fund (IMF) policy of pressuring countries into  liberalizing their capital markets, reports that economists, particularly in developing countries, had long expressed doubts about the virtues of capital market liberalization.

The foregoing effects especially the aspects detailing the positive imparts of liberalization, may have formed part of the reasons why liberalization became a matter of choice in Nigeria in the

1980s.   Financial liberalization which involves banking reforms, insurance reforms and stock market development, without doubt, could have significant effect on stock returns and volatility. Ojo and Adeusi (2012) state that in Nigeria, financial sector reform was a component of the Structural Adjustment Programme (SAP) which was introduced in 1986. They further state that some of the reforms created for the money market indirectly affected the capital market activities simultaneously.  Quoting Nnanna, Englama and Odoko (2004), these reforms according to Ojo and  Adeusi (2012)  include deregulation of interest  rates, exchange rate, entry/exit  into  the banking business, establishment of the Nigeria Deposit Insurance Corporation (NDIC), strengthening the regulatory and supervisory institutions, upward review of capital adequacy, sectorial credit guidelines, capital market deregulation and introduction of direct monetary policy instruments.

Opening of capital markets represents an important opportunity to attract the necessary foreign capital (Kim and Singal, 2000). Foreign capital in the nature of portfolio flows may take a

different pattern when the market is made more open following liberalization. On the issue of regaining access to foreign capital by developing countries, Bekaert and Harvey (2003) argue that portfolio flows to developing countries (fixed income and equity) and foreign direct investment replaced commercial bank debt as the dominant sources of foreign capital. They argue further that portfolio flows to developing countries could not have happened without these countries embarking on a financial liberalization process, relaxing restrictions on foreign ownership of assets, and taking other measures to develop their capital markets, often in tandem with macroeconomic and trade reforms. Specifically, Nigeria was in dire economic crisis in the period preceding liberalization. Omotoye, Sharma, Ngassan, and Eseonu, (2006) are of the view that the oil glut of the mid-1980s exposed the fundamental weakness of the Nigerian economy and  greatly  intensified  the  country’s  debt  management  problems.  On  their  part,  Omoleke, Salawu, and Hassan, (2010) point out that it is a trite fact that, deregulation and privatization in Nigeria are consequences of failure of the state owned enterprises. Also, Adeyemo and Salami (2008) see privatization as a strategy for reducing the size of government and transferring assets and service functions from public to private ownership and control.

According to Alabi, Onimisi and Enete (2010), the argument for economic reforms in Nigeria in the 1980/1990s could be attributed to several reasons among which were: the need for more money to fund imports, policy reactions towards combating the impending economic collapse, external shocks of foreign loans; the enterprises in Nigeria have found themselves in a state of perfidy, low performance and undoubted inefficiency.

Probably as a result of the foregoing, the Babangida government in 1986 applied for what was known as the IMF loan. As part of requirements for the loan, the IMF insisted on certain conditionalities which prescribed exchange rate depreciation, privatisation and liberalization. This resulted in a package that later became known as Structural Adjustment Programme (SAP). It could be argued that these conditionalities were prescribed as part of qualifications for the facility and also due to the need for greater integration of the Nigerian economy into the global economic system. Anyanwu (1992) argues that the IMF-World Bank economic policy packages embodied in President Babangida’s Structural Adjustment Programme (SAP) provided overt encouragement to the fostering of an unregulated, dependent capitalist  development  model, while allowing only a supportive role for the government in a refurbished economic environment

of highly reduced government ownership and control of enterprises.

There is no doubt that these conditionalities were universal in terms of prescriptions for the economic ailments of developing and underdeveloped economies irrespective of backgrounds, structure and individual level of development even when generally classified as developing or underdeveloped. To this extent, Ekpo (1992) is of the opinion that the countries of West Africa continue to experience underdevelopment despite the economic growth of the early and late sixties. He added that the sustained crisis, evidenced in low productivity, high rates of inflation, high rates of unemployment, deterioration in standards of living, huge external debts, social and political chaos, etc,  prompted virtually all the  countries in the  West  African sub-region to implement, in one form or another, the typical International Monetary Fund (IMF) and World Bank adjustment programmes.

Proponents of these  prescriptions can argue that  the  choice  is  anchored on the  belief that globalisation increases economic integration of world economies which manifests in increased trade and investment. In the view of Zekos (2005), globalization is characterised by structural reforms such as trade and investment liberalization and increased trade and international investment flows promoting growth, altering the composition and geographical distribution of economic activities, stimulating competition and facilitate the international diffusion of technologies having significant effects, both positive and negative, for sustainable development. But the level of economic development and the point in the lifecycle of individual economies which could have formed the basis upon which prescriptions were made appears to have been inadvertently omitted. In the case of Nigeria, the economy was characterised by sustained fiscal imbalance and exposure to external shocks which brought about both domestic and external instability. In fact, economic deregulation in Nigeria was not a policy option during the oil boom period of the 1970/1980s as no evidence suggests that external influence on policy choices at that time was strong. The need to transmute from a planned to market economy, although, arose through the influence of the World Bank and IMF, impetus was added by thinking in the international arena due to what was seen as benefits of the free market system. Smith, Jefferis and Ryoos (2003) made a strong case for transition from planned to market economy by stating inter alia: “we believe success requires a psychological readjustment, a mind-shift from the failed assumptions of a decadent, centrally planned economy to those of a competitive, vigorous and

expanding free market”.  Economic deregulation implies the breaking down of barriers to trade and finance.

Financial market liberalization was a major component of economic deregulation in Nigeria. The need to liberalize Nigeria’s financial market may have been hinged on the need to build an efficient and sound financial sector which is vital for poverty reduction and economic growth. The financial sector before deregulation was not well developed and the range of institutions in the sector was narrow.  As a result of this, banks played a limited role in the economy and cash remained the dominant financial instrument. There was, therefore, the need to enhance the financial market infrastructures to enable market deepening.

The importance of stock market liberalization cannot be over-emphasized. On his part, Henry (2000) argues that stock market liberalization is a decision by a country’s government to allow foreigners purchase shares in the market. He added that standard models of international asset pricing predict that stock market liberalization may reduce the liberalizing country’s cost of equity capital. It should be noted that stock market liberalization does not end with just allowing foreigners to purchase shares. It equally entails general lessening of controls and aligning the market to international best practices such as establishing institutional frameworks that will facilitate market development and enhance regulatory roles. Sharma and Vashishtha (2007) are of  the  opinion  that  innovative  changes  in  financial  institutions,  regulatory  structures  and practices, and financial instruments occur, from time to time, over a long period. They explained further that these changes affect the generation, mobilisation and distribution of savings, which are important for shaping the direction and pace of growth of an economy. It  is therefore expedient to find out how liberalization has impacted the Nigerian Stock Market which in turn might have affected the endogenous growth model in Nigeria.

In liberalizing the financial market, the capital market became a component part of the process being a cardinal part of the financial sector. The capital market which represents a major arm of the financial market can be likened to any other market for assets, e.g. the property market. Trading in assets of different types is the major function. Fischer and Jordan (1995) argue that a securities market is a broad term embracing a number of markets in which securities are bought and sold. They explain further that one way in which securities markets may be classified is by

the types of securities bought and sold. Their argument centred on the classification of securities markets;  whether  the  securities  are  new  issues  or  are  already  outstanding  and  owned  by investors. Another classification according to Fischer and Jordan (1995) is by maturity: securities with maturities of one year or less normally trade in the money market; those with maturities of more than one year are bought and sold in the capital market. Markets, however, differ in some respects which were identified by Hutchison and Nanthakumaran (1998) to include presence or absence of a central trading system, homogeneity or otherwise of assets, low versus high lot value of assets traded, quality of available information and number of market participants.

There is a linkage between macroeconomic variables and stock market returns as several models [arbitrage pricing theory (APT), aggregate demand and aggregate supply (AD/AS), monetary transmission  mechanisms,  etc]  provide  a  basis  for  the  long-run  relationship  and  short-run dynamic  interactions among  macroeconomic variables and  stock prices  (Ibrahim and  Aziz,

2003). This linkage implies that policy reactions to economic problems impacts the financial system (both money and capital markets).With the adoption and subsequent implementation of SAP, what could be regarded as economic deregulation in Nigeria evolved. The outcome of this was financial market liberalization and a later boom in both the money and capital markets. With specific reference to the capital market, Ujunwa and Salami (2010) point out that overall, equity culture is increasing among Nigerians.

Due to financial market liberalization in Nigeria, restrictions were lessened and equities listed on the Nigerian Stock Exchange became a serious class of asset to consider in any investor’s portfolio whether local or foreign. That is to say that financial market liberalization provided an opportunity for a stronger interconnection of the local economy to the global economic community  especially  in  the  area  of  funds  flow.    Loungani  and  Razin  (2001)  show  that economists tend to favour the free flow of capital across national borders because it allows capital to seek out the highest rate of return. They identified risk diversification and spread of best practices in corporate governance, accounting rules, and legal traditions as some of the apparent advantages. On their part, Smith-Hillman and Omar (2005) argue that advances in communication  and  transportation  have  created  new  opportunities  that  now  place  Less Developed Countries on the menu of choice in spite of the relatively higher degree of political risk. How Nigeria has benefited from these advantages warrants an empirical examination. This

study, therefore, is modelled after the studies by Kawakatsu and Morey (1999) and Auzairy, Ahmad and Ho (2011) in the areas of liberalization and efficiency of emerging stock market prices; and impact of stock market liberalization and macroeconomic variables on stock market performances respectively.

The stochastic behaviour of the NSE has not been fully addressed in previous studies. Such issues include stochastic dominance, conditional heterascedasticity, chaotic behaviour and stock market efficiency. The need for this type of study has been justified by Jarrett and Kyper (2005) who argued that studies of capital market efficiency are important as they infer that there are predictable properties of the time series of prices of traded securities on organised markets. While Okpara and Nwezeaku (2009) were concerned with whether idiosyncratic risk can be diversified in the Nigerian stock market; Donwa and Odia (2010) analyzed the impact of the Nigerian capital market on her socio-economic development. Olowe (2009) on his part addressed the relation between stock returns and volatility in Nigeria in the light of banking reforms, insurance reform, stock market crash and the global financial crisis. The five year data (2004 –

2009) he employed in his analysis ordinarily looks small but is suitable for the type of study he carried out as he primarily looked at the effects of global financial crises on stock return and volatility. The current global financial crisis is a cycle that will give way to the normal stable stock market situation, although, factors which contribute to the equilibrium of the market may never be the same again.  On their part, Asaolu and Ogunmuyiwa (2011) investigated the impact of macroeconomic variables on Average Share Price.

None of these  studies specifically addressed the  impact of financial liberalization on stock market efficiency in Nigeria, which is the hallmark of this study. Furthermore, the effects of announcement of liberalization of the financial sector on the stock market performance have not been particularly addressed. Bekaert, Harvey and Lundblad (2003) identified the methods by which researchers can date the integration of world equity markets. The dating, according to them is a critical exercise and only when dates are established can research begin to measure the impact of liberalization. This, we have done which defines the scope of this study and  our study considered financial liberalization index while measuring economic activity and also analyzed the impact of liberalization and size of financial market on stock returns in the case of Nigeria which to our knowledge has not been done before; and   therefore, makes this study novel.

Specifically, the study investigated the relationship between financial liberalization and stock market indicators while controlling for the effects of macro-economic variables (interest, exchange and inflation rates) in the context of an emerging economy.

Kim and Singal (2000) enthuse that opening of capital markets represents an important opportunity to attract the necessary foreign capital which also hastens the development of equity markets that is positively related to long run economic growth and a reduction in the cost of external finance. Also, Karolyi (2002) submits that in most empirical studies, the process of market  liberalization  focuses on  important  events  that  facilitate  cross-border capital  flows. Examples include regulatory actions, such as the relaxation of foreign currency controls or foreign ownership limits, and capital market events, such as the introduction of the first country fund for foreign investors. In measuring capital market liberalization which he described as a process and not an event, Karolyi (2002) used the growth and expansion of global cross-listings, especially in the United States by non United States companies through American Depository Recepits (ADRs). He defined ADRs as negotiable claims against ordinary shares in the home market of a company created by U.S. depository banks that trade over-the-counter, on major United States exchanges or as private placements. Along this  line of reasoning, the  major contribution of this study will be the estimation of changes in the level of stock market variables [capitalization ratio, liquidity ratios and returns (ASI)] within the liberalization window.

The short-comings identified by Kawakatsu and Morey (1999) regarding the liberalization index in Nigeria  have now been overcome as Bekaert, Harvey and Lundblad (2003) identified August,

1995 and May 1998 as the official liberalization date and first country American Depository Receipts introduction (indirect means of entering the market) respectively. Miles (2002) also identified August 1998 as official liberalization dates while Jeferris and Smith (1995) point out that restriction on foreign participation were removed in 1995 since when foreign-owned brokerages have  been  permitted  and  controls  on  foreign participation  in  the  ownership  of Nigerian companies have been removed.

Kawakatsu and  Morey (1999)  point  out  that  identification of  liberalization date  has  been described as the most significant liberalization of the market stating further that only a few authors focus on the effect of liberalization on stock market efficiency. This also makes this

study unique. There is therefore a knowledge gap in the literature that warrants a more robust approach. We, therefore, investigated in this study the impact of financial liberalization on the efficiency of the Nigerian Stock Exchange from the announcement year.

1.2      Statement of Problem

The implications of financial market liberalization on stock market efficiency have generated a lot of controversy. The basis for this controversy is whether financial market liberalization has had any effects on the efficient hypothesis of stock markets. Empirical evidence along this line is surrounded with mixed results. In the case of the efficiency of Arab stock markets, Abdmoulah (2010) argues that since efficiency improvements seem to be positively related to market size, efforts to expand and deepen these markets should then be a prime concern. Bekaert, Harvey and Lundblad (2003) argue that if liberalization is effective, it leads to market integration, which has a fundamental impact on both the financial and real sectors of developing countries.

Potential shortcomings of capital market liberalization, according to Semmler and Young (2010) are that too fast liberalized capital markets, with risk assessments solely left to the market, can trigger  boom-bust  cycles,  the  busts precipitated by financial  instability,  entailing  contagion effects and strong negative effects on the real sector of the economy. Another problem bothers on the procedure to adopt in order to systematically identify the date of Nigeria’s stock market liberalization. Henry (2000) points out that official policy decree dates are used when they are available; otherwise two alternatives are used; viz: firstly, permission of foreign ownership through country funds (for example, American or Global Depository Receipts) i.e. since government permission is presumably a necessary condition for establishment of these funds, the date when the first country fund is established is used as proxy for the official implementation date. Secondly, indirect capturing of official implementation dates by monitoring the IFC’s Investability Index. According to Henry (2000), the investability index is the ratio of market capitalization of stocks that foreigners can legally hold to total market capitalization. He adds that a large jump in the investability index (at least 10% increase) is evidence of an official liberalization. To this end, this study contributes importantly to both the literature on financial liberalization and literature on stock market efficiency and also policy implications of these

whether to liberalize more or curtail same.

Many scholars point out the importance of the financial system in mobilizing savings, allocating capital, and easing risk management which they argue is achievable with an efficient stock market. Besides, some theories provide a  conceptual basis  for  the  belief that  larger,  more efficient stock markets boost economic growth; while others argue that the idea of market efficiency has fallen into disrepute as a result of market events and growing empirical evidence of inefficiencies. Admittedly, Cho (1986) points out that the literature on financial liberalization has emphasized the role of the banking sector, which is correctly perceived as the only organized capital market in most developing countries; he, however, points out that it has neglected the potential role of equity markets for efficient capital allocation and risk sharing in a liberalized financial environment. Furthermore, while the argument for financial market liberalization has gained currency, some empirical results differ. One of which is the outcome of a study by Auzairy, Ahmad and Ho (2011) which explored the effects of macroeconomic factors: exchange rates, interest rates and oil prices, on stock market performances in Malaysia, Thailand and Indonesia. The two conclusions supported by the results of their study are: firstly, subsequent stock market liberalization policies implemented in and after 1997 are not significantly effective in improving stock market performances of the liberalizing countries; and secondly, macroeconomic variables have significant impact on the performances of liberalizing countries’ stock markets in some of these events.

The stock market in Nigeria prior to financial market liberalization was characterised by paucity of financial instruments, low turnover ratio and the dominance of government securities. Other features of the  markets  include: poor  infrastructure, illiquidity,  inactive  bond  market, non- automation of trading system and large unclaimed instruments, among others. It was generally believed that the problems that bedevilled the stock market will be ameliorated by financial market liberalization. Liberalization was expected to lead to stock market efficiency which will enable domestic financial institutions duplicate innovations from their more advanced counterparts by offering options and other derivative instruments that are important for shaping the  direction  and  pace  of  economic  growth  and  development.  Although,  the  market  has witnessed growth in key market indicators such as all-share index and market capitalization in recent years but it could not withstand the debilitating effects of the current global economic

meltdown.   Investments worth billions of dollars have been wiped off despite the long-held belief that financial market liberalization will lead to market stability. Does this, therefore, mean that after several years of so-called financial market liberalization, most of the expected benefits have eluded Nigeria?

This importance can be seen from the perspective of savings mobilization, capital allocation and easing  risk  management.  As  the  world  becomes  a  global  village,  rent  seekers  know  no boundaries as international relationships in the arena of politics, science and technology and funds movement create new opportunity set. Defining economic globalization, Gaburro and O’Boyle (2003) see it  as the practice of economic agents (business enterprises, banks, and finance companies) working in different countries and serving the world  market without a prevailing national base. This therefore means that with a well developed stock market, the ever elusive foreign direct investment could flow into the Nigerian economy following liberalization as the rate of return on assets before now was not attractive enough all things being equal. This without doubt will boost economic growth. It is probably from this angle that Lopez-Mejia (1999) argues that the heightened interest of foreign investors in some developing countries has led  to  their  increased  integration  into  the  global  financial  system,  with  benefits  for  those countries and for the global economy.

Without doubt, financial market  liberalization may mean  more  funds flow  to the domestic economy which is essential for growth and development. The stock market is a big channel in this connection, although some issues here are debateable. Despite often divergent views as to how growth of an economy should proceed, development economists and planners seem to agree that successful development requires availability of capital in a sufficient amount (Agbetsiafa,

1998). A stock market that is well developed and efficient can provide opportunity for large pool of capital for investment purposes especially for the long-term.

The above claims and pressure from the International Monetary Fund compelled the Nigerian government to deregulate its financial market in 1986. Thus, it has now become imperative to empirically determine the impact of financial liberalisation on the Nigerian stock market. This study strives to fill this important knowledge void using standard measure of stock market efficiency such as market capitalization ratio, value of shares traded ratio, stock turnover ratio

and all share index (ASI).

1.3      Objectives of the Study

The main objective of the study is to establish the impact of financial liberalization on stock market pricing efficiency in Nigeria. To achieve this, the study strives to fulfil the following specific objectives;

1.      To establish the impact of financial liberalization on market capitalization ratio (size of the capital market) in Nigeria.

2.      To  identify  how  financial liberalization has  impacted on value  of shares traded ratio

(liquidity) in Nigeria.

3.      To  establish the  relationship  between  financial  liberalization and  stock turnover  ratio

(transaction cost) in Nigeria.

4.      To  determine  the  relationship  between  financial  liberalization  and  all  share  index

(aggregate returns) in Nigeria.

1.4      Research Questions

In order to carry out a successful research, the following research questions were postulated to give direction to the study;

1.         Does financial liberalization have positive and significant impact on market capitalisation ratio?

2.         Does financial liberation have positive and significant impact on the value of shares traded ratio?

3.         Is there any positive and significant relationship between financial liberalization and stock turnover ratio in Nigeria?

4.        Does financial liberalization have positive and significant impact on all share index (ASI)

in Nigeria?

1.5      Research Hypotheses

In order to systematically and scientifically enhance the chances of achieving the objectives stated above, the following hypotheses are proposed for this study:

1.        There is  no positive and significant relationship between financial liberalization and market capitalization ratio in Nigeria.

2.        There is  no positive and significant relationship between financial liberalization and value of share traded ratio in Nigeria.

3.        There is no positive and significant relationship between financial liberalization and stock turnover ratio in Nigeria.

4.        There is no positive and significant relationship between financial liberalization and all share index (ASI) in Nigeria.

1.6      The Scope of the Study

Financial liberalization is about the removal of restrictions as a result of government regulation of economic affairs. Arguments ensue whenever the word “financial liberalization” is mentioned especially  in  Nigeria  where  there  is  a  divide  in  public  opinion about  the  advantages and disadvantages of liberalization. The benefits of liberalization in some economies have been realized through privatisation and implementation of policies that minimize price distortions which are the hallmarks of economic liberalization. Metwally (2004) shows how most Middle Eastern governments encouraged the role of the private sector by opening up the economy to international trade and encouraging competitiveness.

With liberalization of the financial market, the capital market was expected to attain a new level of efficiency whether the weak-form, semi-strong form or the strong-form. This work will examine the various concepts of efficiency within the period: 1986 – 2011. The choice of period was informed by data availability and the impact of economic liberalization on the stock market efficiency prior to the global economic meltdown which aggravated from 2008. This period marks the beginning of events leading to liberalization announcements and actual period of liberalization and post liberalization period. We would strive to identify as practically as possible the advantages of economic liberalization as well as its disadvantages. Some of the advantages have already been highlighted above while one of the probable disadvantages is the case of huge foreign direct investment that may lead to the superimposition of foreign managerial expertise over local ones as is the case with multinational-corporations. However, it is succinct to state that the main focus of this study is to find out how financial market liberalization has impacted on the efficiency of the stock market in Nigeria. Although liberalization is a process and continuous; the post liberalization period terminating in 2011 is deemed convenient for the purposes of this research exercise.

1.7      Significance of the Study

This study is important since it investigates the impact of financial market liberation on the stock market efficiency. This has become important given revelations from most scholars that financial liberalization will be best located in economies with favourable macroeconomic environment. Thus, it is apt to compare stock market efficiency or performance index with using liberalization index to establish the pattern and trend of their interactions from the adoption year till 2011 in Nigeria. Besides that, the study also investigates the association among stock market indicators, macroeconomic variables and  financial market liberalization in the context of an emerging economy. The major contribution of this study will be the use of liberalization index, stock market  and  macroeconomic  variables  in  the  analysis  of  market  efficiency  in  Nigeria. Specifically, four sets of stock market indicators and the level of foreign equity ownership as an index of financial liberalization and macroeconomic variables were used to investigate whether liberalization has improved the efficiency of the Nigerian stock market in line with the prevailing theory of market efficiency.

The study also accommodated the short-comings of previous studies on Nigeria such as Kawakatsu and Morey (1999), Bekaert, Harvey and Lundblad (2003), Miles (2002) and Jeferris and Smith (1995). These studies estimated for lagged-effect, based on the assumption that the adoption of financial liberalization will not have immediate effect on the economy in their cross- country studies for developed and developing economies. However, recent revelations have shown that because adoption of such policy is a national policy that involves extensive national debate and opinion pull in some cases, the impact manifests even before the adoption of such policy. Based on this, it is currently advocated that for any study to contribute to the debate, it must incorporate the year of policy adoption even if it is the last month of the year. This study incorporated the postulation by using the period 1986-2011.

The study will be of immense benefit to the following;

i)         Policy makers in Nigeria who will derive valuable lessons as the country combats the consequences of a fragile financial sector. There may be need for a rethink of the extent of market openness as a result of privatization.

ii)        The study will provide a basis for investors to evaluate the impact of market opening on the Nigerian stock market behaviour.

iii)       The study will benefit stakeholders in the financial market as it will focus on significant and varied structural changes in the economy as a result of financial market liberalization that has led to meteoric growth in stock market indices before the recent crash. A leeway will therefore be handy.

iv)       Foreign investors will benefit since equities listed on the Nigerian Stock Exchange have become an asset class in globally-diversified portfolios as the study will identify how regulatory  reforms   have   been   used   to   foster   stock   market   development   since liberalization has made Nigeria to be interconnected with other economies.

v)        The findings from this study can provide helpful insights for other stock markets    in transition.

vi)       Researchers/academicians will benefit equally as the findings from this research will provide answers to some issues yet to be resolved in the area of study and a platform to initiate future research.

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