Role Of Stock Market In The Growth Of Economy
The stock market plays a pivotal role in shaping the trajectory of economic growth by serving as a dynamic platform for capital mobilization and allocation. Essentially, it functions as a financial marketplace where stocks, representing ownership in companies, are bought and sold. This market not only facilitates the raising of funds for businesses through initial public offerings (IPOs) but also allows investors to trade these securities, fostering liquidity and price discovery. The interconnected nature of financial markets and the real economy implies that the performance of the stock market reflects and influences economic health. Positive trends in stock prices can bolster investor confidence, encouraging spending and investment, while downturns may lead to a contraction in economic activity. Additionally, the stock market serves as an indicator of corporate performance and economic expectations, influencing decisions across various sectors. In essence, the stock market’s multifaceted role extends beyond a mere financial marketplace, actively contributing to the vitality and resilience of an economy.
This study attempts to investigate the Role of the Stock Market in the Growth of the Nigerian Economy spanning through 1980 – 2010. The broad objective of this work is to ascertain the role of the stock market in output growth in Nigeria using Market Capitalization as a proxy for the stock market taking cognizance of some intervening variables. This was evaluated using OLS Method. It was observed that market capitalization has a significant impact on economic growth as well as the latter Granger Causing the former. There are also other variables that are modeled alongside market capitalization that affect the output of Nigeria. The policy recommendation in this work centres on deliberate attempts by the government and every agent responsible for the existence of the market either as a player or an umpire to be up and doing especially the government. The work is organized into five chapters, time series data were used with three regressors: market capitalization, domestic savings and value of traded stocks.
Title Page
Certification
Dedication
Acknowledgement
Abstract
Table of Content
CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Question
1.4 Objectives of the Study
1.5 Hypothesis of the Study
1.6 Significance of the Study
1.7 Scope of the Study
CHAPTER TWO
2.0 LITERATURE REVIEW
2.1 Theoretical Literature
2.2 Empirical Literature
CHAPTER THREE
3.0 RESEARCH METHODOLOGY
3.1 Model Specification
3.1.1 Functional Form Specification
3.1.2 Econometric Specification
3.2 Estimation Procedure
3.2.1 Economic Test
3.2.2 Econometric Test
3.2.3 Diagnostic Test
3.3 Sources of Data
CHAPTER FOUR
4.0 PRESENTATION AND ANALYSIS OF DATA
4.1 Presentation of Regression Result
4.2 Evaluation of Result
4.3 Econometric Test
4.4 Econometric Criteria(Second Order Test)
4.5 Interpretation of Result
4.6 Policy implication of Findings
CHAPTER FIVE
5.0 SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSIONS
5.1 Summary of findings
5.2 Recommendations
5.3 Conclusions
Bibliography
Appendix
INTRODUCTION
1.1 Background of the Study
Stock Market is viewed as a medium to encourage savings, help channel savings into productive investment, and improve the efficient and productivity of investment. The emphasis on the growth of stock markets for domestics‘ resource mobilization has also been strengthened by the need to attract foreign capital in non-debt creating forms. A viable equity market can serve to make the financial system more competitive and efficient. Without equity markets, companies have to rely on internal finance through retained earnings. Large and well established enterprises are in a privileged position because they can make investment from retained earnings and bank borrowings, while new companies do not have easy access to finance. Without being subjected to the scrutiny of the stock market, big firms get bigger, and for the emerging smaller companies, retained earnings and fresh cash injections
from the controlling shareholders may not be able to keep pace with the needs for more equity financing which only an organized market place could provide. The corporate sector would also be strengthened by the requirements of equity markets for the development of widely acceptable accounting standards, disclosure of regular, adequate, and reliable information. While closely held companies can camouflage poor investment decisions and low profitability, at least for a while, public held companies cannot afford this luxury. The availability of reliable information would help investors make compares‘ of the performance and long term prospects of companies; corporations to make better investment and strategic decisions; and provide better statistics for economic policy makers.
Success in capital accumulation and mobilization for development varies among nations, but it is largely dependent on domestic savings and inflows of foreign capital. Therefore, to arrest the menace of the current economic downturn, effort must be geared towards
effective resource mobilization. It is in realization of this that consideration is given to measure the development of capital market as an institution for the mobilization of finance from the surplus sectors to the deficit sectors. Levine (1991) showed a positive relation between financial stock market and economic growth by issuing new financial resources to the firms. The financial stock market facilitates higher investments and the allocation of capital, and indirectly the economic growth. Sometimes investors avoid investing directly to the companies because they cannot easily withdraw their money whenever they want. But through the financial stock market, they can buy and sell stocks quickly with more independence. An efficient stock market contributes to attract more investment by financing productive projects that lead to economic growth, mobilize domestic savings, allocate capital efficiently, reduce risk by diversifying, and facilitate exchange of goods and services (Mishkin 2001; and Caporale et al, 2004).
1.2 Statement of the Problem
There is abundant evidence that most Nigerian businesses lack medium and long –term capital. The business sector has depended mainly on short-term financing such as overdrafts to finance even long-term investment. Based on the maturity matching concept, such financing is risky. All such firms need to raise an appropriate mix of short- and long-term capital (Demirguc-Kunt and Levine 1996). Most recent literatures on the Nigeria Capital Market have recognized the tremendous performance the market has recoded in recent times. However, the vital role of the capital market in economic growth and development has not been empirically investigated thereby creating a research gap in this area. This study is undertaken to examine the contribution of the capital market in the Nigerian economic growth and development. Aside the social and institutional factors inhibiting the process of economic development in Nigeria, the bottleneck created by the deficiency of finance to the economy constitutes a
major setback to its development. As a result, it is necessary to evaluate the Nigerian capital market.
1.3 Research Questions
In the light of the research problems, this study attempts to answer the following:
1. Does stock market have a significant effect on economic growth?
2. Does investment have a significant effect on GDP?
3. What is the causality between stock market and economic growth?
1.4 Objectives of the Study
The broad objective of this study is to examine the role that the stock market plays in the growth process of the Nigerian economy.
However, the specific objectives are as follow:
1. To determine the nature of relationship between stock market and economic growth.
2. To examine the determinants of investment in the stock market.
3. To determine the causality between stock market and economic growth.
1.5 Hypotheses of the Study
1. Ho: That the capital market has a negative relationship with economic growth.
2. Ho: portfolio Investment in Nigeria is not a determinant of economic growth.
3. Ho: There is no causal relationship between stock market and economic growths.
1.6 Significance of the Study
The study will explore the effectiveness of capital market instruments on Nigerian economic growth. Though the scope of study will be limited to the capital market, it is hoped that the exploration of this market will provide a broad view of the operations of the capital market. It will contribute to existing literature on the subject matter by investigating empirically the role, which the capital market plays in the economic growth and development of the country. The main importance of this study is that it will provide policy
recommendations to policy – makers on ways to improve operations and activities of the capital market.
1.7 Scope of the Study
The economy is a large component with lot of diverse and sometimes complex parts; this research work will only look at a particular part of the economy (the financial sector). This work will not cover all the facts that make up the financial sector, but shall focus only on the capital market and it role as it impacts on the Nigerian economic growth. The empirical investigation of the role of the capital market on the economic growth in Nigeria shall be restricted to the period between 1980 and 2010 a period of thirty (30) years.
Role Of Stock Market In The Growth Of Economy:
The stock market plays a significant role in the growth of an economy. It serves as a crucial component of the financial system, facilitating the allocation of capital, promoting economic growth, and offering several benefits to both businesses and individuals. Here are some key roles of the stock market in the growth of an economy:
- Capital Formation: The stock market allows companies to raise capital by issuing stocks (equity) to the public. This capital can be used for various purposes, such as expanding operations, investing in research and development, and funding new projects. By providing a platform for companies to access funds, the stock market encourages investment and economic expansion.
- Efficient Allocation of Resources: Stock markets help allocate capital efficiently by directing investments to companies with the most promising growth prospects. Investors buy and sell stocks based on their expectations of future earnings and profitability, which guides resources to companies that are likely to contribute more to the economy.
- Corporate Governance: Publicly traded companies are subject to regulatory oversight and shareholder scrutiny. To attract investors and maintain their stock prices, companies often adopt better corporate governance practices, which can include transparent financial reporting, accountability, and responsible management. This helps in reducing corporate fraud and mismanagement, contributing to economic stability.
- Wealth Creation: Stock markets provide opportunities for individuals to invest and participate in the growth of businesses. As the value of their investments increases, individuals can accumulate wealth over time, which can lead to higher consumer spending, increased savings, and investment in other areas of the economy.
- Liquidity: Stock markets offer liquidity to investors, enabling them to buy and sell stocks relatively quickly. This liquidity encourages more people to invest in stocks, as they know they can convert their investments into cash when needed. This liquidity can also extend to the broader economy, as investors may use their stock market gains to finance other investments or consumption.
- Risk Diversification: Investors can diversify their portfolios by investing in a variety of stocks across different industries and sectors. This diversification helps reduce investment risk and promotes financial stability. A stable financial environment is essential for economic growth.
- Indicator of Economic Health: The performance of the stock market is often considered an indicator of economic health. A rising stock market can boost consumer and business confidence, leading to increased spending and investment. Conversely, a declining market can signal economic concerns, prompting policymakers to take corrective actions.
- Job Creation: As companies grow and expand, they often create jobs to meet increased demand and expand their operations. A thriving stock market, by facilitating access to capital and encouraging growth, can indirectly contribute to job creation and lower unemployment rates.
- Innovation and Entrepreneurship: Access to funding through the stock market can encourage entrepreneurship and innovation. Entrepreneurs and startups can raise capital through initial public offerings (IPOs) to finance their ventures, fostering technological advancements and new business ideas.
In summary, the stock market plays a vital role in the growth of an economy by facilitating capital formation, efficient resource allocation, wealth creation, corporate governance, and more. However, it’s important to note that a well-regulated and transparent stock market is essential for it to fulfill these roles effectively and contribute positively to economic growth.