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Role Of The Nigerian Stock Exchange On Capital Formation

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67 Pages
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7,573 Words

The Nigerian Stock Exchange (NSE) plays a fundamental role in fostering capital formation within the Nigerian financial landscape. As a vital component of the nation’s economic infrastructure, the NSE serves as a dynamic platform that facilitates the mobilization of funds for businesses and governments. Through the issuance of stocks and securities, companies can raise capital to finance expansion, research and development, and other strategic initiatives. Investors, in turn, are presented with opportunities to participate in the growth of these enterprises, contributing to wealth creation and economic development. The NSE’s role in capital formation extends beyond merely serving as a marketplace; it acts as a catalyst for economic growth by encouraging investment, stimulating entrepreneurship, and enhancing liquidity in the financial market. In essence, the NSE serves as a pivotal institution, driving economic progress by connecting capital-seeking entities with potential investors, thereby fostering a resilient and thriving financial ecosystem in Nigeria.

ABSTRACT

This study was carried out to determine the effect of stock market on capital formation in Nigeria. The variables included in the model were, Gross Fixed Capital Formation, value of share traded, interest rate, inflation rate, commercial bank investment indicator, and Stock Market Capital. Data were sourced from CBN statistical bulletin (2011). The study employed OLS technique to determine the effect of stock market on capital formation. The empirical finding shows that stock market capital, commercial bank investment indicator, inflation rate, interest rate, value of share traded and Gross Fixed Capital Formation. Based on the findings, the following recommendations were made. The total liberalization of the financial sector and encouragement of Nigerians to take advantage of the stock exchange.

TABLE OF CONTENT

Title Page
Approval Page
Dedication
Acknowledgment
Abstract
Table of Contents

 

CHAPTER ONE
1.0 INTRODUCTION

1.1 Background of the Study
1.2 Statement of the Problem
1.3 Research Question
1.4 Research Objectives
1.5 Research Hypothesis
1.6 Significance of the Study

CHAPTER TWO
2.0 LITERATURE REVIEW

2.1 Theoretical Framework
2.2 Empirical Literature
2.3 Limitations of the Previous Studies

CHAPTER THREE:
3.0 INTRODUCTION

3.0 Research Methodology
3.1 Model Specification
3.2 Estimation Procedure
3.3 Evaluation Methods
3.3.1 Economic A Priori Test
3.3.2 Evaluation Based on Statistical Criteria
3.3.3 Evaluation Based on Econometric Criteria
3.4 Sources of Data

CHAPTER FOUR
4.0 PRESENTATION AND ANALYSIS OF RESULTS

4.1 Presentation of Result
4.2 Analysis of the Result
4.2.1 Analysis of the Regression Coefficients
4.2.2 Analysis of the Evaluation Methods
4.2.2.1 Evaluation Based on Economic Criteria
4.2.2.2 Evaluation Based on Statistical Criteria
4.2.2.3 Evaluation Based on Econometric Criteria
4.3 Evaluation of the Research Hypothesis

CHAPTER FIVE
5.0 SUMMARY, RECOMMENDATIONS AND CONCLUSION

5.1 Summary
5.2 Recommendations
5.3 Conclusions
Bibliography

 

 

 

 

 

 

CHAPTER ONE

1.0 INTRODUCTION
1.1 BACKGROUND OF THE STUDY

Almost all the economist laid emphasis on capital formation as the major determinant of economic growth. The meaning of capital formation is that society does not apply the whole of it’s current productive activity to the needs and immediate desire of consumption, but directs some part of it to the creation of capital goods, tools and instruments, machines and transport facilities, plants and equipments all the various forms of real capital that can so greatly increase the efficiency of productive effort. The essence of capital formation is to divert a portion of society’s currently available resources for the purpose of increasing the stock of capital goods so as to make possible for an expansion of consumable output in the future.
The research focuses it’s attention on Nigerian Stock Exchange which as the most visible mirror of the formal capital market in the country. The Nigerian Stock Exchange is one of the institutions on the capital market, which specializes in all forms of marketing trading securities. It is a network of individual institution and instrument. The market plays a central and dispensable role for which is has been variously described as the “hall mark” or the heart of the capital market.
The rapid economic development of any economy depends, among other things, on ready access of adequate financial resources (Alile and Anao, 1990). The desire to develop financial market in an economy is intimately connected with the objective of accelerating industrial and agricultural development. Among this financial market is the stock exchange, which deals with the mobilization of bank medium and long term capital funds (Sule and Momoh, 2009). The mechanism of stock exchange came into existence to
enable investment, which were inherently illiquid to become liquid through reconversion into cast at the decision of the investor without inconveniency the company (Olowe, 1997). Today, words like globalization have become familiar in economic and finance parlance and past growing intern dependence of economics and financial markets cannot be ignored.
The development of the capital market in Nigeria dates back to 1946, when the first government securities was floated; the institutional facilities for the operation was however absent and did not commence until fifteen years later, when the Nigerian Stock Exchange (now the Nigerian Stock Exchange) was established in 1961.
Consequently, in 1953, the Federal Government set up a committee under Professor R.H. Barback to advise on ways and means to fostering a shares market in Nigeria. The report
of the committee was published in 1959 and it recommended among other things:
(1) The creation of facilities for dealing in shares
(2) The establishment of rules regulating transfer and;
(3) Measures to encourage saving and issue of government and other organizations.
As follow up to this report, the then Lagos Stock Exchange now Nigerian Stock Exchange was incorporated on 15th September, 1960 through the collective encouragement of the business community, the Nigerian Industrial Development Bank Limited (NIDB) and the Central Bank of Nigeria.
Conclusively, the availability of a secondary market endangers capital formation and socio-economic development. The allocative function as critical in determining the overall growth of the economy ie, the financial sector. Therefore, the role of the Nigerian Stock Exchange in the economy is an
engine for capital formation saddles with the private sector in general to achieve economic development program.

1.2 STATEMENT OF THE PROBLEM
The Nigerian Stock Exchange market is faced with numerous problems which comprises of decreased trading activities where by persistent rise in the demand for securities without a corresponding increase in its supply. In this case, investments are not easily found for purchase.
Given the number of years since the Nigerian Stock Exchange has been established and the substantial financial resources available in the country, coupled with the existing institutions one can claim that the entire spectrum of the capital market has not been sufficiently active, especially when compared with the capital unit of similar or lesser aged units in other developing countries. The factors responsible for this could be identified to include:
(1) High Cost of transaction
(2) Lack of transparency and
(3) Poor economic performance etc.
The spinal effect of the global economic crisis on the Nigerian Stock Exchange continued in 2009 with the exorbitant lending rate mounting pressure on the stock market as a result of massive borrowed fund in the market. The rush by stock investors to liquidate their investment to repay their loans in order to avoid the excessive lending rate caused the Nigerian Stock Market to crash. (Sere Ejembi, 2008) noted that it is not the global financial crisis and the speculative sub prime mortgage bubbles and bust alone that is responsible for the crash of the stock market, other contributory factors lent support. Some of these, namely; margin lending by the deposit money banks (DMBs), stock price appreciation that had no correlation with the fundamentals in the quoting companies and local investors
opting to invest in foreign capital markets to take advantage of the low stock price.
This study intends to evaluate the performance of the Nigerian Stock Exchange interms of its trading activities and determine the extent to which it’s contributes to the capital formation process of the economy of at all there is causation between them.

1.3 RESEARCH QUESTION
The study will examine the following questions,
1. How does the Nigerian Stock Exchange influence capital formation in Nigeria?
2. What factors influence capital formation in the Nigerian economy?
3. What is the role of Stock Exchange on capital formation in Nigeria

1.4 RESEARCH OBJECTIVES
This study is primarily aimed at examining critically, the activities and performance of the Nigerian Stock Exchange especially, the study aims to;
1. To determine the impact of the Nigerian Stock Exchange on capital formation.
2. To evaluate the performance and growth of the Nigerian Stock Exchange.
3. To determine how the exchange could stimulate investment.
4. To quantify the relative importance of the Stock Exchange in determining the capital formation for national development.

1.5 RESEARCH HYPOTHESIS
The hypothesis that could be tested in this study is stated below:
(1) H0: The Nigerian Stock Exchange has no significant impact on capital formation.
(2) H1: The Nigerian Stock Exchange has significant impact on capital formation.

1.6 SIGNIFICANCE OF THE STUDY
The significant of this research is to examine the usefulness of the Nigerian Stock Exchange as a vehicle for capital market shows that Nigerian Stock Exchange contributes positively to the national development because it portrays the capabilities to raise funds from the surplus to the deficit for investment purpose.
Therefore, the design of an optimal capital structure, which ensures adequate and sustainable growth for national
development; this is the responsibility of the Nigerian Stock Exchange. The beneficiaries of this research work are the government, industries and individuals would benefit from the capital market role on capital formation.

 

 

 

 

 

 

 

 

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Role Of The Nigerian Stock Exchange On Capital Formation:

The Nigerian Stock Exchange (NSE) plays a crucial role in capital formation within Nigeria’s economy. Capital formation refers to the process of mobilizing savings and investment to generate funds for businesses and government to finance their growth and development. The NSE serves as a primary platform for raising capital and facilitating economic growth through various means:

  1. Facilitating Equity Capital: The NSE provides a platform for companies to raise equity capital by issuing shares to the public through initial public offerings (IPOs) and subsequent rights issues. This enables businesses to access funding for expansion, research and development, and other capital-intensive projects. By selling shares to investors, companies can raise substantial capital without incurring debt.
  2. Secondary Market Trading: The NSE serves as a secondary market where investors can buy and sell existing shares of publicly-listed companies. This liquidity in the market encourages more people to invest in stocks, knowing they can easily convert their investments into cash if needed. This, in turn, provides companies with a continuous source of capital for growth and expansion.
  3. Debt Capital: In addition to equity, the NSE facilitates the issuance of corporate bonds and government bonds. Companies can raise capital by issuing bonds, which are debt securities, to investors. Similarly, the government can fund infrastructure projects and meet its financial obligations by issuing bonds. Investors buy these bonds, providing the capital needed for these activities.
  4. Promoting Economic Growth: By allowing businesses to raise capital efficiently, the NSE promotes economic growth. This growth translates into job creation, increased economic activity, and improved living standards for the population.
  5. Enhancing Financial Literacy: The NSE contributes to financial literacy by educating the public about investment opportunities and financial markets. Through various initiatives, seminars, and educational programs, the NSE helps individuals and institutional investors make informed investment decisions.
  6. Attracting Foreign Investment: A well-regulated and active stock exchange can attract foreign investors looking for investment opportunities in Nigeria. Foreign investments can significantly contribute to capital formation and economic growth.
  7. Market Integrity and Regulation: The NSE maintains market integrity through robust regulatory mechanisms, such as listing requirements, disclosure standards, and continuous monitoring of market activities. This fosters investor confidence and encourages capital inflow.
  8. Corporate Governance: The NSE promotes good corporate governance practices among listed companies. This not only safeguards investors’ interests but also enhances the attractiveness of these companies to both local and international investors.
  9. Resource Allocation: By efficiently channeling capital to companies and projects with growth potential, the NSE helps allocate resources to where they are most needed in the economy, contributing to productivity and development.

In summary, the Nigerian Stock Exchange plays a pivotal role in capital formation by providing a platform for companies and governments to raise capital through equity and debt offerings, facilitating secondary market trading, promoting economic growth, enhancing financial literacy, attracting foreign investment, ensuring market integrity, and fostering good corporate governance. These functions are essential for the sustainable development and growth of Nigeria’s economy.