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THE IMPACT OF CAPITAL MARKET INSTABILITY ON THE GROWTH OF
NIGERIA ECONOMY
CHAPTER ONE
INTRODUCTION
1.1 Background to the study
In every developing and developed economy, the capital market
has been identified as an institution that drives growth and development. The capital market is a conduit for the
demand and supply of debt and equity capital then channel funds to firms with
relatively high and increasing productivity thus, enhancing economic expansion
(Donwa, 2010). Capital market provides a means through which a nation gets the
local and foreign investment it needs for sustainable growth and development.
Capital market offers varieties of financial instruments that
enable economic agents to pool price and exchange risks through assets with attractive
yields, liquidity and risk characteristics (Nwakwo 1991). The financial crises
which started in the United States (due to certain laxities in the US financial
system), spread to Europe and has become global. Even countries not affected by
the crises before are now affected by second round effect (CBN 2009).
Olawale (2015) revealed that stock markets across the globe
have been severely affected by the current financial crises ravaging the global
economy. This resulted in large loses recorded by these markets since second
half 2008 and volatility, making the markets unstable over the years. Yahaya et
al. (2011) posited that the financial meltdown impacted negatively on the
operational performance and efficiency of the Nigeria stock market. The Nigeria
stock market has witnessed volatility over time.
Stock market volatility is a measure for variation of price
of a financial asset overtime.it is essentially concerned with the dispersion
and not direction of price changes. Issues of volatility in stock market
behavior are of importance as they shed light on the data generating process of
the returns (Hongyu & Zhicha, 2006) as a result, such issues guide
investors in their decision making process because not only are the investors
interested in returns but also in
uncertainty of such returns. A volatile stock market weakens consumer
confidence and drives down consumer spending (Porteba, 2000). The author
further indicated that it affects business investment because it conveys a rise
in risk of equity investment. This can alter investment equilibrium position of
an economy as investors turn to purchase stocks of larger well known firms at
the expense of new firms. It can trigger a general rise in cost of capital and
directly affect economic growth. Investor’s portfolio allocation would be
affected as they would have to hold more stocks in their portfolio in order to
reap the benefits of diversification (Frimpong & Oteng-Abaiye 2006)
The positive linkage school of thought has it in view that a
well-functioning capital market will precipitate long term economic growth (Alile
1984; Atje & Jovanovich 1993; Oyijide 1994). The opposing school of thought
however believes that the alleged positive linkage between capital market
development and economic growth is not proven and at best is ambiguous
(Dimirgnc-Kuut & Levine 1996; Shleifer and summer 1988). In contributing to
this discourse, it was found out that there is a bidirectional causal
relationship between stock market development and economic growth.
1.2 Statement of the problem
Capital market which is a division of financial market has a
goal primarily to mobilize long term funds for productive purposes and by so
doing provide a means for small as well as large scale enterprises to trade in
securities by giving them access to public
listing. The Nigeria capital market has evolved with growth of Nigerian
economy. The performance of all stock listed and the total values of shares
outstanding of its listed companies revealed that the market has enjoyed a
decade of unprecedented growth over the years.
Prior to 2008, the total market capitalization increased by
over 90.0%, however from a peak in march 2008,capitalization went into
spiraling decline dropping by about 45.8% by the end of the year (Security and
Exchange Commission 2009). Before the financial crises, the Nigeria capital
market had remained illiquid and experienced a downward trend in stock prices.
And as a result, the market was becoming very risky to invest and less
attractive to long term investors, both foreign and local (Business day 2010).
In a study carried by Osaze (2002), capital market rank
behind money market in terms of attractiveness to business organization as a
source of finance. Adding that, not less than 60% of total savings is in the
money market. This may be attributed the loss of confidence by investors as a
result of high risk in the capital market. This situation presents danger for
the economy because the money market is not designed to provide development
funds for big organizations.
Market performance witnessed a serious hike in 2007, gets to
its peak around March 2008 and began to witness a sharp decrease in 2009 due to
the contagion effect from the global financial crisis. Trading volume and
number of listed securities in the Nigeria stock market have been fluctuating
over the years. This study therefore examines the effect of capital market
volatility on the growth of the Nigeria economy.
1.3 Research Question
Based on the above stated problems, the following research
questions were raised for this study;
i. What impact does All share index and number of listed
securities have on the economic growth of Nigeria?
ii. Investigate the effect market capitalization and market
trading volume have on the growth of the economy of Nigeria?
1.4 Significance of the Study
This study specifically examined the effect of capital market
instability on the growth of the Nigeria economy. This study is important
because, the Nigeria capital market, which was the toast of many enlightened
Nigerians both home and abroad, is now experiencing a meltdown as market
capitalization has declined especially, in periods ranging from 2007 to 2015.
The All share index has also fallen in the same period. Trading volume and
total number of listed securities are also experiencing tremendous movement
over the years.
This study is expected to complement the efforts of
government and policy makers in reviving the Nigeria stock market and
implementing improvements that will add value and stability to the market,
making it a world class capital market and in turn, enhance the growth of the
Nigeria economy. This study would also consolidate existing literature on the
issues surrounding the relationship between capital market and economic growth.
1.5 Objectives of the study
The broad objectives of this study is to examine the impact
of capital market instability on the growth of Nigeria economy. In order to
achieve the general objective, the following specific objectives were raised;
i. To determine the impact of All Share Index and total
number of listed securities on the growth of the economy.
ii. To examine the effect of market capitalization and market
trading volume on the growth of the economy.
1.6 Hypotheses of the study
Ho1 All Share Index and total number of listed securities
have no significant effect on the growth of the economy
Ho2: Market capitalization and market trading volume has no
significant impact on the economy growth of Nigeria.
1.7 Scope of the study
This study is concerned with the impact of the Nigeria
capital market instability on the growth of the economy in particular. However,
for simplicity, the study will cover period ranging from 2001 to 2015. This
period of 15 years was selected firstly because it is has the most current
market situation. Also, half of this particular years experienced boom while
the other half experienced a downcast.
1.8 Plan of the Study
The research report of this study is divided into 5 chapters.
Chapter one consist of introduction to the study and it is sub-divided into 9
headings which are background of the study, statement of problem, research
questions etc. Chapter two is the literature review which comprise of the
conceptual, empirical and theoretical framework. Chapter three is the research
methodology which mainly concerns itself about the design of the study, the
method of data collection, sample size, sampling technique, method of data
analysis and the decision rule. The second to the last chapter, chapter four
comprise of the research data presentation and analysis and the last chapter,
chapter five is the summary, conclusion and recommendation of the research.
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