OUTLINE FOR RESEARCH PROPOSAL

1.1 Background of the study

1.2 Statement of the problem

1.3 Research questions

1.4 Objectives of the study

1.5 Justification of the study

1.6 Scope of the study

1.7 Statement of the theory or hypothesis

1.8 Methodology

1.9 Organization of the study

References

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1.1 BACKGROUND OF THE STUDY

Many countries want to attain an high level of economic growth and development, they were

inspired by the famous book “an enquiry into the nature and causes of wealth of a nation” by

Smith (1776).

Different models and theories have been developed by economists in an attempt to increase

the level of economic growth.

Labour, capital and technology have been the usual factors considered to be important for

economic growth.

Mckinnon and Shaw (1973), King and Levine (1993), Beck, Levine and Loayza (2000)

among others have argued that stock market development spurs economic growth. On the

other hand, Bossone (2000), and Tsuru (2000), Levine (1997) and Gertler (1988) stressed

that economic growth can be affected by functions exercised by stock market such as

amassing capital, helping to allocate resources, assessing managers, and enabling risk

management.

A shift of focus, however, has occurred, coupled with recent happenings in the economic

growth theory, from the conventional factors (labour, capital and technology) to those that

could also add value to the process of growth.

They include foreign direct investment (FDI), political stability, macroeconomic

environment, financial and stock market development, among others.

The prospects of long-term economic growth is assisted by improvement in the allocation of

resources which is provided by the stock market.

According to (Ezeabisili & Alajekwe, 2012). an opportunity to diversify portfolios is

provided for investors via a flexible stock market. Hence limiting the investment risk and

directing investment towards more profitable investments.

Without a liquid stock market, many profitable long-term investments would not be

undertaken because savers would be reluctant to tie up their investments for long periods of

time (Okonkwo, Ogwuru & Ajudua, 2014).

According to (Okonkwo, Ogwuru & Ajudua, 2014). A lot of profitable long-term

investments would not be possible without a flexible stock market due to the hesitation of

savers to undertake long-term investments.

As noted by Beck and Levine (2002), growth and profit incentives is an offshoot of a well-

functioning stock market, which also dilutes risk by spreading it across various investments.

Advanced markets might make liquidity available for low income countries that lack

sufficient local savings, with a reduced cost implication of foreign capital necessary for

development, (Bencivenga, Smith and Stair 1996).

Growth, profit incentives and risk management is better catered for by a proper stock market

compared to the bank-based system (Levine, 2002 and Beck and Levine, 2002).

Cheap liquidity which reduces the price of foreign funds is provided for developing countries

with insufficient local savings by a well developed stock market.

Bencivenga, Smith and Starr (1996)

Development of the stock market is vital for economic growth. The level of economic

growth,

trade openness and financial strength of any country is known by the level of stability of the

general stock market index.

Levine and Zervos (1998), Demirguc-Kunt and Levine (1996) and Atje and Jovanovic (1993)

This backdrop provides a precedence for this paper.

1.2. STATEMENT OF THE PROBLEM

The ill-advised repressive policies of the 1970s and 1980s led to the adoption of liberal

financial measures to correct the policies. Thus, the stock market was seen as an engine of

growth, therefore attempts were made to develop it. The stock market has performed

extremely well since 1986. An illustration of this would be seen in the increase in the size of

market capitalization from N8.3 billion in 1987 to N16.19 trillion in 2016. However this

period experienced the transition from military dictatorship (1986 – 1999) to democracy

(1999 – 2016). It’s worth noting however that stock market capitalization in 1966 and 1999

respectively was N8.3 billion and N300 billion, a difference of N293.2 billion, and a

percentage increase of 43.12% across 13years, which results in an average of 3.3% year-on-

year growth rate. This is in sharp contrast to the rate of growth of stock market capitalization

from 1999 to 2016. In 1999 and 2016 respectively, market capitalization was N300 billion

and N16.19 trillion repectively, a difference of N15.89 trillion, and a percentage increase of

5,297% across 17years, which results in an average of 311,59% year-on-year growth

The huge discrepancy in the level of growth between (1986 – 1999) and (1999 – 2016) needs

to be examined to find out the causative factors. Also, the effect of the global financial crisis

of 2007-2008 on the Nigerian stock market leaves many questions unanswered, with a two-

year consecutive drop in the value of market capitalization from N13.18 trillion in 2007 to

N9.56 trillion (-27%) and N7.03 trillion (-26.48%) in 2008 and 2009 respectively.
This raises a number of questions. What impact has the stock market had on Nigeria’s economic

growth? What impact did the transition from military rule to democracy have on the performance

of the stock market? What was responsible for the huge discrepancy between the level of growth

of the stock market capitalization between (1986 – 1999) and (1999 – 2016)? What impact did

the global financial crisis of 2007-2008 have on the Nigerian stock market?

1.3. . RESEARCH QUESTIONS

1.To what extent is the performance of the Nigerian economy affected by the level of market

capitalization ratio.

2.To what extent has the Nigerian economy been affected by the size of the stock market?

3.What impact did the transition to democracy impact on the level of performance of the

stock market?

4.What impact did the financial crisis of 2007-2008 have on the of the stock market?

1.4. OBJECTIVES OF THE STUDY

The broad objective of this study is to examine the impact of stock market on economic

growth in Nigeria from 1985 – 2016.

While specific objectives of this study are;

1. to analyse the relationship between market capitalization ratio and economic growth in

Nigeria.

2. to examine the effect of the size of the stock market on economic growth.
3. to examine the effect of the transition to democracy on the performance of the stock

market

4. to examine the effect of the financial crisis in 2008 on the stock market.

1.5 JUSTIFICATION FOR THE STUDY

Previous works of this nature have done little or nothing to examine the effect of transition

from democracy to military rule on the performance of the stock market. Also, this work

takes into consideration the effect of the financial crisis in 2008 on the Nigerian stock

exchange, a period in which the stock market took a huge hit.

These provide a justification for the study.

1.6. SCOPE OF STUDY

The scope of this research is limited to the impact of the stock market on economic growth of

Nigeria from 1985 – 2016. The period under review includes both the military regime

(1985 – 1999) and democratic dispensation (1999 – 2016). The scope has been carefully

chosen to study the effect of the stock market on the economy both in the military regime and

the democratic regime. Perhaps unsurprisingly the democratic dispensation is expected to

outperform the military period, due to the relative ‘freedom’ the market enjoys.

1.7. STATEMENT OF THEORY OR HYPOTHESIS

Mckinnon-Shaw (1973) Hypothesis

FINANCIAL REPRESSION

Mckinnon and Shaw (1973) hypothesis; states that financial liberalization and stock market

development would spur economic growth through their influence on the growth rate of

savings, investment, and eventually lead to economic growth.

McKinnon and Shaw (1973) opined that the repressed financial markets (low and adjusted

interest rates, limits on domestic debt, enormous reserve obligations of commercial banks

and concessional credit practices) reduce the level of savings, imbalance the efficient

distribution of resources, promote the compartmentalization of financial markets, constrains

investment and in turn lowers the economic growth rate.

The McKinnon-Shaw thesis emphasises that a low or negative real rate of interest inhibits

savings and thus a reduction in funds available for investors, investment reduces and

economic growth is negatively impacted.

Alternatively, the real interest rate could be improved upon to encourage savers, investment

is therefore positively affected and economic growth is achieved. Bouzid (2012)

acknowledged that this concept resonated with reputable international institutions such as the

World Bank and the International Monetary Fund (IMF).

The recommended implementations have been observed by several developing nations to

turn the tide of events.

The financial liberalization framework was intended to free up interest rates by switching

from a managed interest rate structure to one which interest rate is market-determined;

lessening controls on debt by slowly and systematically eliminating directed and subsidized

credit schemes; building primary and secondary securities markets; encouraging and enabling

competition and efficiency in the financial system by returning the nationalized commercial

banks to the private sector (Bouzid, 2012)

Here, the result of the financial liberalization process depends on: the strengthening of the

financial sector, a positive correspondence between savings and the real interest rate, and

balance of investment and demand for capital (Bouzid, 2012).

The theory is basically advocating for the ‘freeing up’ of the financial markets to make room

for growth and expansion.

1.8. METHODOLOGY

The method of analysis of data adopted in this study was strongly influenced by the

objectives of this study and the hypothesis stated. Therefore, econometric and statistical

method of data analysis was adopted. Ordinary least square (OLS) regression analysis by

way of simple linear correlation analysis was adopted as the method for analysing the data.

The study covered the time period of 1985 to 2016. The relevant secondary data generated in

the time period were collected from the Nigerian Stock Exchange (NSE) Annual Reports and

the Central Bank of Nigeria (CBN).

1.9. ORGANIZATION OF STUDY

- Chapter one is the introduction, stating the background of the study, research problem,

objective, hypothesis and significance of the study.

- Chapter two contains the conceptual/theoretical framework and empirical review of past

literature.

- Chapter three contains the methodology of the study i.e. the research design, population and

sample size, data collection procedures and techniques of data analysis.

- Chapter four deals contains the presentation of data analysis and interpretation of findings

- Chapter five concludes the study by giving a brief summary of the research findings,

conclusion and recommendations based on the study.

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