CHAPTER ONE

INTRODUCTION

1.1. Background to the Study

Developing nations like Nigeria recognize that in order to leverage commercial investment,

better financial markets are essential (Umar, 2022). Promoting economic growth and

development is the main goal of every nation. In order to do this, poor nations would need to

invest significantly each year in order to achieve the Sustainable Development Goals (SDGs)

(World Bank, 2022; Olowe et al., 2022; Emiola & Fagbohun, 2021). This investment

requirement makes it more important than ever to develop efficient financial markets in order to

leverage commercial finance. As a result, the role that capital markets play in financing the

expansion of infrastructure, large corporations, and Small and Medium-Sized Enterprises

(SMEs), as well as the links between these elements and economic growth, are becoming

increasingly more prominent (Nkemgha et al., 2023; Azimi, 2022; Ezeibekwe, 2021).

The capital market is a financial market where securities backed by equity or long-term debt

(more than a year) are bought and sold (Ikeobi, 2020; O'Sullivan & Sheffrin, 2003). The capital

market connects savings and investments between capital providers and capital users through

intermediaries (Didier, et al., 2021). The capital markets are a network of specialized financial

institutions, a collection of infrastructure, processes, and mechanisms that facilitate connections

between providers and consumers of long-term capital (Abayomi & Yakubu, 2022; Omimakinde

& Otite, 2022). The capital market according to Adereti and Mayowa (2021) links the monetary

sector and the real sector of the economy, which is involved in the production of goods. Given

this role in the economy, Abayomi and Yakubu (2022), and Ayeni and Fanibuyan (2022) added
that it is obvious that capital markets are important because they allow for real sector expansion

by giving producers of goods and services as well as organizations in charge of developing

infrastructure access to long-term financing.

In Nigeria, the capital market is crucial to the country's economy (Iortyer & Maji, 2022; Iyaji, &

Onotaniyohwo, 2021). Data from the Central Bank of Nigeria (CBN) indicates that the Nigerian

capital market has expanded in recent years (CBN, 2020). Greater investor awareness, market

confidence, and comparatively stable political conditions, as well as the Federal Government's

economic reform initiatives in the areas of bank and insurance firm consolidation, privatization,

pension reform, and mortgage, are predominantly responsible for this increase (CBN, 2020). For

instance, the all-share index has risen steadily from 5,672.7 points in 1998 to 24,085.8,

28,078.81, and 42,716.44 points as at December of 2005, 2012, and 2021 respectively (CBN,

2021). In the same vein, total market capitalisation has increased considerably from N262.5

billion in 1998 to N7,764.5 billion as at April 30, 2007, and reaching N26.76 trillion in the first

quarter of 2022 (CBN, 2021).

Despite these, the price of equities has been fluctuating in the Nigerian capital market, which has

not been favorable to investors and by extension, the economy (Umar, 2022; InfoGuide Nigeria,

2022). For instance, Nigeria's capital market suffered a significant slump along with others

around the world during the 2009 global financial crisis. Furthermore, Nigeria's economic

slumps in 2016 and 2020 are a sign of a troubled financial system (Kolawole, 2022). Abayomi

and Yakubu (2022), Umar (2022), and the InfoGuide Nigeria (2022) identified additional

problems, including an unstable market, industry risk, regulatory issues with the Nigerian capital

market, operational shell banks or institutions, a lack of knowledge about the Nigerian capital
market, a problem with the size of the market, a problem with savings setbacks, a problem with

lack of technology, and an issue with the overconcentration of the capital market.

Economic growth has historically been primarily influenced by factors like capital, labor, and

technology, according to economists, however, as the recent financial crisis has shown, a lack of

confidence in the financial system has serious economic effects (Abayomi and Yakubu, 2022;

Udofia et al., 2022; Olubunmi 2021). As a result, academic literature has recently given the

operation of financial systems a lot of attention. This is because a sound financial system makes

sure that the best investments get the finance they require, while the less promising ones are

denied funding, enabling an economy to fully realize its growth potential. Along this line, this

study explores the impact of Nigeria's capital markets on the country's economic growth

spanning 1986 to 2021.

1.2. Statement of the Problem

There is abundant evidence that most Nigerian businesses lack long-term capital. The business

sector has depended mainly on short-term financing such as overdrafts to finance even long-term

capital. 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& Levine 1996). Most

recent literatures on the Nigeria capital market have recognized the tremendous performance the

market has recorded 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 dearth 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. Significance and Justification of the Study

The study explored the impact or effectiveness of capital market instruments on Nigerian

economic growth. 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.

1.4. Research Aim and Objectives

Aim

The aim of this research is to analyze the impact of capital market on the economic growth of

Nigeria.

Objectives

The following objectives are listed below to help realize the study's aim:

1. To determine how Nigeria’s Market capitalization (MKTCAP), Value of transactions

(VATRAN), Number of Deals (NUD) affects the Economic Growth (GDP).

2. To evaluate the overall performance of the capital market in relation to the economic growth

in Nigeria.

3. To make recommendations as to how the operations of the market could be improve to boost

economic growth and development of Nigeria.

1.5. Research Questions

1. What is the relationship between Market capitalization (MKTCAP), Value of transactions

(VATRAN), Number of Deals (NUD) and the Economic Growth of Nigeria?

2. What is the performance of the capital market in relation to economic growth in Nigeria?

3. How could the capital market through its crucial role stimulate economic growth in Nigeria?

1.6. Research Hypothesis

The hypothesis that would be tested in the course of this research is stated below as:

H 0: Capital market has no significant impact on the growth of the Nigerian economy.

H 0: There is no positive relationship between value of transactions and economic growth in

Nigeria.

H 0: There is no positive relationship between market capitalization and economic growth in

Nigeria.

H 0: There is no positive relationship between number of deals and economic growth in Nigeria.

1.7. Scope and Limitations of the study

The economy is a large component with lot of diverse and sometimes complex parts; this

research work only looked at a particular part of the economy (the financial sector). This work

did not cover all the facets that make up the financial sector, but focuses only on the capital

market and some supposed factors that influence capital market as it impacts on the Nigerian

economic growth. The empirical investigation of the impact of the capital market on the

economic growth in Nigeria was restricted to the period between 1986 and 2021 due to the non-

availability of some important data.

1.8. Definition of Terms

a. Capital Market: The capital market is a financial market where long-term debt or equity-

backed securities are bought and sold. It consists of the primary market (where new securities are

issued) and the secondary market (where existing securities are traded).

b. Economic Growth: Economic growth refers to the increase in a country's production of

goods and services over time, typically measured by the growth in Gross Domestic Product

(GDP). It is an essential indicator of a nation's prosperity and development.

c. Stock Exchange: A stock exchange is a marketplace where buyers and sellers trade shares of

publicly listed companies. It provides a platform for companies to raise capital by issuing stocks

and for investors to buy and sell these stocks.

d. Securities: Securities are financial instruments that represent ownership or debt. Common

types include stocks (equity securities) and bonds (debt securities). They are traded in the capital

market.

e. Market Capitalization: Market capitalization (market cap) is the total value of a company's

outstanding shares of stock, calculated by multiplying the stock's current market price by the

total number of outstanding shares.

f. Value of Transaction: The value of a transaction is the total amount of money involved in the

exchange of goods, services, or financial instruments.

g. Real Gross Domestic Product: It's the total value of all final goods and services produced

within a country in a specific period, adjusted for inflation. This means it removes the effect of

price changes, giving you a clearer picture of how much the economy is actually growing or

shrinking.
 CHAPTER TWO

LITERATURE REVIEW

2.1. Theoretical and Conceptual Framework

Capital market is defined as the market where medium to long terms finance can be raised. The

capital market is the market for dealing (that is lending and borrowing) in long term loanable

funds.

Substantial academic literature and government strategies support the finance-led growth

hypothesis, based on an observation first made almost a century ago by Joseph Schumpeter that

financial markets significantly boost real economic growth and development. Schumpeter

asserted that finance had a positive impact on economic growth as a result of its effects on

productivity growth and technological change. As early as 1989 the World Bank also endorsed

the view that financial deepening matters for economic growth "by improving the productivity of

investment". (Wikipedia, 2011).

In another exposition, Ekezie (2002) noted that capital market is the market for dealings

(i.e. lending and borrowing) in longer-term loanable funds. Mbat (2001) described it as a forum

through which long-term funds are made available by the surplus to the deficit economic units. It

must, however, be noted that although all the surplus economic units have access to the capital

market, not all the deficit economic units have the same easy access to it. Companies can finance

their operations by raising funds through issuing equity (ownership) or debenture/bond borrowed

as securities. Equities have perpetual life while bond/debenture issues are structured to mature in

periods of years varying from the medium to the long-term of usually between five and twenty-

five years.
2.2. The Capital Market and Economic Growth

Jhingan (2004) the capital market is a market which deals in long term loans. It supplies

industries with fixed and working capital and finance medium term and long-term borrowings of

the central, states and local governments. Thus, the capital market comprises the complex of

institutions and mechanisms through which medium term funds and long-term funds are pooled

and made available to individual business and governments.

The capital market has been identified as an institution that contributes to the socio-economic

growth and development of emerging and developed economies. This is made possible through

some vital roles played, such as channeling resources, promoting reforms to modernize the

financial sectors, financial intermediation capacity to link deficit to surplus sector of the

economy, and a veritable tool in the mobilization and allocation of savings among competitive

uses which are critical to the growth and efficiency of the economy (Pat &James, 2010).

According to Levine and Zervos (1998) the capital market is expected to encourage savings by

providing individuals with an additional financial instrument that may better meet their risk

preferences and liquidity needs. Better savings mobilization may increase the savings rate.

Capital markets also provide an avenue for growing companies to raise capital at lower cost. In

addition, companies in countries with developed stock markets are less dependent on bank

financing, which can reduce the risk of a credit crunch. Stock markets therefore are able to

positively influence economic growth through encouraging savings amongst individuals and

providing avenues for firm financing.

The challenge of economic growth is the availability of long-term funding, far longer than the

duration for which most savers are willing to commit their funds and this constitutes a barrier to

economic growth. In this regard, the capital market provides an avenue for the mobilization and
utilization of long-term funds for development and hence it is referred to as the long-term end of

the financial system. Over the past few decades, globally there has been an upsurge in capital

market activity and this suggests the growing recognition of the capital market as a tool for fast-

tracking economic progress.

Sule and Momoh (2009) argues that through the capital formation and allocation mechanism the

capital market ensures an efficient and effective distribution of the scarce resources for the

optimal benefit to the economy and it reduces the over reliance of the corporate sector on short

term financing for long term projects and also provides opportunities for government to finance

projects aimed at providing essential amenities for socioeconomic development. In a study

published at the beginning of the nineties. Levine (1991) points out that capital markets can help

the process of financial integration, financial intermediation and speed up the economic growth

through two key processes. The first is by making property changes possible in the companies,

whilst not affecting their productive process; the second is by offering higher possibilities of

portfolio diversification to the agents.

In principle, the capital (stock) market is expected to accelerate economic growth, by providing a

boost to domestic savings and increasing the quantity and the quality of investment. The market

is expected to encourage savings by providing individuals with an additional financial instrument

that may better meet their risk preferences and liquidity needs. Better savings mobilization may

increase the saving rate. The capital market also provides an avenue for growing companies to

raise capital at lower cost. In addition, companies in countries with developed stock market are

less dependent on bank financing, which can reduce the risk of a credit crunch. The capital

market therefore is able to positively influence economic growth through encouraging savings

among individuals and providing avenues for firm financing (Charles & Charles, 2007).
Osaze (2000) sees the capital market as the driver of any economy to growth and development

because it is essential for the long-term growth capital formation. It is crucial in the mobilization

of savings and channeling of such savings to profitable self-liquidating investment. The Nigerian

capital market provides the necessary lubricant that keeps turning the wheel of the economy. It

not only provides the funds required for investment but also efficiently allocates these funds to

projects of best returns to fund owners. This allocative function is critical in determining the

overall growth of the economy. The functioning of the capital market affects liquidity,

acquisition of information about firms, risk diversification, savings mobilization and corporate

control (Anyanwu 1998). Therefore, by altering the quality of these services, the functioning of

stock markets can alter the rate of economic growth (Equakun 2005).

Okereke- Onyiuke (2000) posits that the cheap source of funds from the capital market remain a

critical element in the sustainable development of the economy. She enumerated the advantages

of capital market financing to include no short repayment period as funds are held for medium-

and long-term period or in perpetuity, funds to state and local government without pressures and

ample time to repay loans.

Based on the performance of capital market in accelerating economic growth, government of

most nations tends to have keen interest in its performance. The concern is for sustained

confidence in the market and for a strong investor’s protection arrangement. Economic growth is

generally agreed to indicate development an economy, because it transforms a country from a

five percent saver to a fifteen percent saver. Thus, it is argued that for capital market to

contribute or impact on the economic growth in Nigeria, it must operate efficiently. Most often,

where the market operate efficiently, confidence will be generated in the minds of the public and
investors will be willing to part with hard earned funds and invest them in securities with the

hope that in future they will recoup their investment. (Ewah et al, 2009)

The theoretical explanation on the nexus between capital market and economic growth is further

expanciated using Efficient Market Hypothesis (EMH) developed by Fama in 1965. According to

EMH, financial markets are efficient when prices on traded assets that have already reflected all

known information and therefore are unbiased because they represent the collective beliefs of all

investors about future prospects. Previous test of the EMH have relied on long-range dependence

of equity returns. It shows that past information has been found to be useful in improving

predictive accuracy. This assertion tends to invalidate the EMH in most developing countries.

Equity prices would tend to exhibit long memory or long-range dependence, because of the

narrowness of their market arising from immature regulatory and institutional arrangement. They

noted that, where the market is highly and unreasonably speculative, investors will be

discouraged from parting with their funds for fear of incurring financial losses. In situations like

the one mentioned above, has detrimental effect on economic growth of any country, meaning

investors will refuse to invest in financial assets. The implication is that companies cannot raise

additional capital for expansion. Thus, it suffices to say that efficiency of the capital market is a

necessary condition for growth in Nigeria. (Nyong, 2003).

Ariyo and Adelegan (2005) contend that, the liberalization of capital market contributes to the

growth of the Nigeria capital market, yet its impact at the macro-economy is quite negligible.

In another exposition, Gabriel (2002) as enunciated by Nyong (2003) lay emphasis on the

Romanian capital market and conclude that the market is inefficient and hence it has not

contributed to economic growth in Romanian.

Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to attain

sustainable economic growth and development. The capital market provides a means through

which this is made possible.

Ewah, et al (2009) capital market provide the opportunities for the purchase and sale of existing

securities among investors thereby encouraging the populace to invest in securities fostering

economic growth.

2.3. Empirical Review

2.3.1 The Impact of Capital on Economic Growth

Levine and Zervos (1996) examines whether there is a strong empirical association between

stock market development and long-run economic growth. The study used pooled cross-country

time-series regression of forty-one countries from 1976 to 1993 to evaluate this association. The

study toes the line of Demirguc-Kunt and Levine (1996) by conglomerating measures such as

stock market size, liquidity, and integration with world markets, into index of stock market

development. The growth rate of Gross Domestic Product (GDP) per capita was regressed on a

variety of variables designed to control for initial conditions, political stability, investment in

human capital, and macroeconomic conditions; and then include the conglomerated index of

stock market development. The finding was that a strong correlation between overall stock

market development and long-run economic growth exist. This means that the result is consistent

with the theories that imply a positive relationship between stock market development and

economic growth.

Demiurguc-Kunt and Levine (1996) using data from 44 countries for the period 1986 to 1993

found that different measures of stock exchange size are strongly correlated to other indicators of

activity levels of financial, banking, non-banking institutions as well as to insurance companies

and pension funds. They concluded that countries with well-developed stock markets tend to also

have well-developed financial intermediaries.

Amadi, Oneyema and Odubo (2000) employed multiple regression to estimate the functional

relationship between money supply, inflation, interest rate, exchange rate and stock prices. Their

study revealed that the relationship between stock prices and the macroeconomic variables are

consistent with theoretical postulation and empirical findings in some countries. Though, they

found that the relationship between stock prices and inflation does not agree with some other

works done outside Nigeria.

Barlett (2000), states that rising stock prices have two main effects on the economy; first, it

raises wealth in the economy. This increase in wealth raises the amount of consumer spending

and thereby increases the wealth of the nation. Secondly, rising stock prices can increase

investment spending. We see that one way a firm can finance investment spending is to issue

stock. If stock prices rise, it can raise more money per share of the stock issued. He further added

that the main mechanism through which the stock market affects the economy is the so-called

wealth effect. A standard ‘‘rule of thumb‟ is that every $1 increase in stock market wealth boosts

consumer spending by 3 to 7 cents per year, with a common point estimate being 4 cents.

According to him, this happens because a rise in stock market wealth encourages consumers to

cut back on savings or increase their debt, and increase their spending on consumption goods.

Conversely, a fall in the market causes them to cut back on consumption by a similar

magnitude”.

Arestis et al. (2001) examine the relationship between stock market development and economic

growth through quarterly time-series data for five developed economies while controlling for the

effect of banking system and market volatility. These countries are: the USA, the UK, France,
Germany, and Japan. The period covered 1968-1998 although the data span is different for

different countries in the sample. The results reveal that in Germany, there is evidence of

bidirectional causality between banking system development and economic growth. The stock

market on the other hand is weakly exogenous to the level of output. In the USA, financial

development does not cause real GDP in the long-run. Japan exhibits bidirectional causality

between both banking and stock market variables and the real GDP, while in the UK the results

indicate evidence of unidirectional causality from banking system to stock market development

in the long-run, but the causality between financial development and economic growth in the

long-run is very weak. The evidence in France suggests that in the long-run both the stock

market and banking system contribute to real GDP but the contribution of the banking system is

much stronger.

Nwokoma (2002), attempts to establish a long-run relationship between the stock market and

some of macroeconomic indicators. His result shows that only industrial production and level of

interest rates, as represented by the 3-month commercial bank deposit rate have a long-run

relationship with the stock market. He also found that the Nigeria market responds more to its

past prices than changes in the macroeconomic variables in the short run.

Ibrahim and Aziz (2003) investigate the relationship between stock prices and industrial

production, money supply, consumer price index, and exchange rate in Malaysia. Stock prices

are found to share positive long-term relationships with industrial production and CPI. On the

contrary, he found that stock prices have a negative association with money supply and

(Ringgist) exchange rate. Irving (2004) considered the links between stock exchanges and

overall socio-economic development to be tenuous, nonexistent or even harmful. He advised

African countries not to devote further scarce resources and efforts to promoting stock exchange,
since there are many weightier problems to address in Africa: high poverty levels, inadequate

social services and undeveloped infrastructure. Even if the resources were available, stock

markets could expose already fragile developing economies to the stabilizing effects of short-

term, speculative capital inflows.

Carporale et al. (2004) examine the causal relationship between stock market and economic

growth. Through vector auto-regression (VAR) methodology, the paper uses a sample of seven

countries, Argentina, Chile, Greece, Korea, Malaysia, the Philippines and Portugal. The overall

results indicate that a well-developed stock market can foster long-run economic growth. In

another study, Carporale et al. (2005) use the vector autoregression (VAR) framework to test the

endogenous growth hypothesis for four countries: Chile, South Korea, Malaysia and the

Philippines. The overall findings indicate that the causality between stock market components,

investment and economic growth is significant and is in line with the endogenous growth model.

It shows also that the level of investment is the channel through which stock markets enhance

economic growth in the long run.

Adam and Sanni (2005) examined the role of stock market in Nigeria’s economic growth using

Granger-Causality test and regression analysis. The authors discovered a one-way causality

between GDP growth and market capitalization and a two-way causality between GDP growth

and market turnover. They also observed a positive and significant relationship between GDP

growth turnover ratios. The authors advised that government should encourage the development

of the capital market since it has a positive relationship with economic growth.

Ted Arzarmi et al (2005) examined the empirical association between stock market development

and economic growth in India. The authors found no evidence of association between the Indian

stock market development and economic growth in the entire period they studied. Whereas the
authors found support for the relevance of stock market development in economic development

during pre-liberalization, they discovered a negative relationship between stock market

development and economic development for the post liberalization period.

Dritsaki and Dritsaki-Bargiota (2005) use a trivariate VAR model to examine the causal

relationship between stock, credit market and economic growth for Greece. Through monthly

data covering the period 1988:1-2002:12, their results reveal unidirectional causality from

economic development to stock market and bidirectional causality between economic

developments and the banking sector. The paper establishes no causal relationship between stock

market function and banking sector.

Elumilade and Asaolu (2006) examine the relationships between stock market capitalization rate

and interest rate. Time series data obtained for the period 1981-2000from Central Bank of

Nigeria (CBN) and Nigeria Stock Exchange (NSE) were analyzed using regression. The data

obtained were fitted to the equation by ordinary least-square (OLS) regression method. Results

showed that the prevailing interest rate exerts positive influence on stock market capitalization

rate. Government development stock rate exerts negative influence on stock market

capitalization rate and prevailing interest rate exerts negative influence on government

development stock rate. The study further revealed information as very important to capital

market development. It was therefore recommended that the operators of the Nigeria capital

market should raise the level of awareness so that investors will be abreast with the happenings

in the market.

Capasso (2006) uses a sample of 24 advanced OECD and some emerging economies to

investigate the link between stock market development and economic growth covering the period

1988-2002. The findings show a strong and positive correlation between stock market
development and economic growth and he later concludes that stock markets tend to emerge and

develop only when economies reach a reasonable size and with high level of capital

accumulation.

Adam and Tweneboah (2008) examined the impact of macroeconomic variables on stock prices

in Ghana using quarterly data from 1991 to 2007. They examined both the long-run and short-

run dynamic relationships between the stock market index and the economic variables-inward

foreign direct investment, treasury bill rate, consumer price index, average oil prices and

exchange rates using cointegration test, Vector Error Correction Model (VECM). They found

that there is cointegration between macroeconomic variable and stock prices in Ghana indicating

long-run relationship. The VECM analysis shows that the lagged values of interest rate and

inflation have a significant influence on the stock market. Also, the inward foreign direct

Investments, oil prices, and the exchange rate demonstrate weak influence on price changes.

Serkan (2008) investigates the role of macroeconomic factors in explaining Turkish stock

returns. He employed macroeconomic factor model from the period of July 1997 to June 2005.

The macroeconomic variables consider are growth rate of industrial production index, change in

consumer price index, growth rate of narrowly defined money supply, change in exchange rate,

interest rate, growth rate of international crude oil prices and return on the MSCI World Equity

Index. He found that exchange rate, interest rate and world market return seem to affect all of the

portfolio returns, while inflation rate is significant for only three of the twelve portfolios. Also,

industrial production, money supply and oil prices do not appear to have significant effect on

stock returns in Turkey.

Ezeoha et al (2009) investigated the nature of the relationship that exists between stock market
development and the level of investment (domestic private investment and foreign private

investment) flows in Nigeria. The authors discovered that stock market development promotes

domestic private investment flows, thus suggesting the enhancement of the economy’s

production capacity as well as promotion of the growth of national output. However, the results

show that stock development has not been able to encourage the flow of foreign private

investment in Nigeria.

Oluwatoyin and Ocheja (2009) examine the impact of stock market earnings on income of the

average Nigerian using time series data covering the period 1980-2007. Applying co-integration

and error correction modeling to stock market performance and per capital income time series

data, the findings indicated the separate roles played by the primary capital market and the

secondary capital in market in the growth of stock market earnings that has impacted positively

on Nigerian per capita income. By and large, the evidence from this study revealed that while

activities in the secondary capital market tend to grow the stock market earnings through its

wealth effect that of the primary market ironically did not.

Enisan and Olufisayo (2009) through autoregressive distributed lag (ARDL), evaluate the long-

run relationship between stock market development and economic growth in seven of the Sub-

Saharan African countries. The results indicate that stock market has a positive and significant

impact on growth. Causality results indicate unidirectional causality from stock market

development to economic growth for both South-Africa and Egypt. While Cote D’Ivoire, Kenya,

Morocco and Zimbabwe indicate bidirectional causality, Nigeria on the other hand shows weak

evidence that growth causes finance.

Osinubi (1998) examines whether stock market promotes economic growth in Nigeria between

the period 1980 and 2000. The study employed the Ordinary Least Squares (OLS) regression
technique as the method of data estimation. The regression results, confirms that there exist

positive relationship between the economic growth and the measures of stock market

development used. However, these relationships are statistically insignificant. This in essence

means that the effect of stock market on economic growth is weak and insignificant.

Maku and Atanda (2010) examines critically the long-run macroeconomic determinants of stock

market performance in Nigeria between 1984 and 2007. The Augmented Engle-Granger (AEG)

cointegration test results indicates that the macroeconomic variables have long-run simultaneous

significant effect on the stock market performance in Nigeria. Generally, the empirical analysis

showed that the NSE all share index is more responsive to changes in exchange rate, inflation

rate, money supply, and real output. While, the entire incorporated macroeconomic variables

were found to have simultaneous and significant impact on the Nigerian capital market

performance in the long-run.

 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Research Approach and Design

A research approach is the framework used in a study to gather and analyze data on the variables

that make up that study. In the opinion of Palys and Atchison (2014), the sort of research

approach and design that will be used to handle a particular research topic depends on the nature

of the study's aim and objectives, research questions, and the availability of data. Therefore, a

quantitative research approach was used in this study as it analyzes the capital market and the

economic growth of Nigeria. The quantitative technique was used for this study because it

enables the statistical examination of secondary data. The relationship between variables can

then be empirically measured as a result.

Another justification for utilizing the quantitative research approach is that this research

methodology allows the use of secondary data in achieving the study's aim and objectives. Thus,

results and findings are made objectively and not subjectively, as in the case of the qualitative

approach. Additionally, the quantitative research design was appropriate for this study since it

allowed the researcher to test for causal correlations between the independent variables (market

capitalization, all share index, value of share traded and number of deals) and the dependent

variable (Nigerian GDP). Based on empirical findings and with room for generalization, this

research designs also enables forecasting and prediction of the Nigerian economy's future trends.

This reason also justified its adoption in the study.

3.2. Research Sampling and Description and Sources of Secondary Data

3.2.1. Research Sampling

Secondary data were employed in this investigation. Research information that has already been

collected and is readily available to researchers is known as secondary data. Periodical

publications, journals, government publications, official documents, statistics bulletins, libraries,

and online searches all provide this data (Ajayi, 2017). Particularly, time series secondary data

from the years 2000 to 2020 were used in this research. The study therefore used a total sample

size of 20 observable annual data sets. These data include annual time series data from 2000-

2020 on Real Gross domestic product (RGDP), market capitalization (MCAP), values of stocks

traded (VST), all shares index (ASI) and number of deals (NOD). The availability and

accessibility of these data as regards the variables used in the study informed the selection of the

study's timeframe.

3.2.2 Method of data collection

The study used secondary source of data collection. The data is annual time series for economic

growth proxied by real Gross domestic product (RGDP), market capitalization (MCAP), values

of stocks traded (VST), all shares index (ASI) and number of deals (NOD). The data span from

the period of 2000 to 2020. The data on all the variables are to be sourced from Central Bank of

Nigeria’s publications, specifically, the CBN annual activity Statistical Bulletins.

3.3. Quality of Secondary Data

According to Martins et al. (2018), one must carefully assess if secondary data are relevant for

certain research because they are gathered for various purposes and from various sources.
However, the secondary data used in this study were obtained from reliable sources and they

were considered pertinent to the research. The idea that these data are accurate and error-free was

validated by the fact that they were accessible and gathered from international and national

organizations like the National Bureau of Statistics (NBS), and the Central Bank of Nigeria

(CBN). The data are also accessible from a variety of sources in a manner that can be used. The

data accurately measure both the study's dependent and independent variables, taking into

account their quality and relevance to the study's aim and objectives. Thus, Mulhern (2011)

noted that secondary data can be a wonderful source of affordable yet valuable information when

carefully assessed using these criteria.

3.4. Methods of Data Analysis

In order to determine the pattern or trend of the time series data for the review period (2000 to

2020), the study initially used trend analysis in its data analysis. This was carried out for every

variable (Real Gross domestic product (RGDP), market capitalization (MCAP), values of stocks

traded (VST), all shares index (ASI) and number of deals (NOD).). To ascertain the association

between the dependent variable (Nigeria’s Real Gross domestic product (RGDP)) and the

explanatory variables (market capitalization (MCAP), values of stocks traded (VST), all shares

index (ASI) and number of deals (NOD)), the study adopted Ordinary Least Square regression

analysis and cointegration test. These statistical methods were chosen for the study because they

are suitable for analyzing time series secondary data. Hence, the statistical software;

Econometric Views (E-views) was used.

3.5. Model Specification

The model to be used in this study was adopted from the work of Owolabi and Ajayi (2013). The

model considered RGDP as the dependent variable and the independent variables were market
capitalization (MCAP), values of stocks traded (VST), and all shares index (ASI), and number of

deals (NOD). The model specification is given below:

RGDP=β 0 + β 1 MCAP+ β 2 VST + β 3 ASI + β 4 NOD+ μ

Where;

RGDP = Real Gross Domestic Product

MCAP = Market Capitalization

VST = Value of Stocks Traded

ASI = all shares index

NOD = Number of Deals

μ = error term

β 0= represents the intercept

β 1= this parameter estimates the market capitalization

β 2 = this parameter estimates the value of stock traded

β 3 = this parameter estimates the all shares index

β 4 = this parameter estimates the number of deals

It shows that economic growth as proxy by real GDP is functionally related to market

capitalization, values of stocks traded, all shares index and number of deals.

3.6. Justification of Methods

The research used a quantitative method of analysis to assist in predicting, proving or disproving

the hypothesis. Time series data is used to provide information for the relevant years. The choice

of OLS technique was guided by the fact that it is the best linear unbiased estimator (BLUE).
Ordinary least square of multiple regression analysis was necessary to estimate the relationship

between the dependent and the independent variables. The Johansen cointegration test is used to

examine whether a long run relationship exists among the variables.

 CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1. Introduction to the Section

This section deals with the statistical evaluation and presentation of data relevant to the study’s

aim and objectives. Hence, the least square regression analysis and cointegration test were

adopted in evaluating the data using Econometric Views (EViews) statistical software. The

regression analysis was used in determining the relationship between the dependent variable and

the independent variables. Whereas, the cointegration test was useful in ascertaining whether

there is a long-term relationship between the dependent variable and the independent variables as

stated in the methodology chapter. Also, trend analysis was first used in visualizing the time

series secondary data (NBS, 2022; CBN, 2022) to understand the pattern of the data set for the

period under review (see appendix for the data set).

4.2. Results

4.2.1. Trend Analysis of Nigeria’s Real Gross Domestic Product (2000-2020)

 Figure 1: Trend analysis of Nigeria’s Real Gross Domestic Product (2000-2020)

The trend analysis shows that Nigeria’s RGDP exhibits a consistent upward trajectory, indicating

that Nigeria's RGDP has generally expanded over the period from 2000 to 2020. This signals

positive economic growth overall.

4.2.2. Trend Analysis of Nigeria’s Market Capitalization (2000-2020)

Figure 2: Trend analysis of Nigeria’s Market Capitalization (2000-2020)

The trend analysis demonstrates a clear upward trend in Nigeria's market capitalization from

2000 to 2020. This indicates a significant expansion of the Nigerian stock market over the two

decades.
4.2.3 Trend Analysis of Nigeria’s Value of Stock’s Traded (2000 - 2020)

Figure 3: Trend Analysis of Nigeria’s Value of Stock’s Traded (2000 - 2020)

The trend analysis exhibits a consistent upward trajectory, indicating a general increase in the

value of stocks traded in Nigeria from 2000 to 2020. This suggests growth and expansion in the

Nigerian stock market. A significant peak is observed around 2015, with VST potentially

reaching a high of nearly 3,000,000. The increase in VST suggests a growing level of activity

and investment in the Nigerian stock market over the past two decades.
4.2.4. Trend analysis of Nigeria’s All Share Index (2000-2020)

Figure 4: Trend Analysis of Nigeria’s All Share Index (2000 - 2020)

The trend analysis exhibits a generally upward trend over the 20-year period, indicating an

overall expansion of the Nigerian stock market. The upward trend is non-linear, meaning the rate

of growth has varied over time. There have been periods of faster growth (e.g., 2010-2014) and

slower growth (e.g., 2000-2005).

4.2.5 Trend Analysis of Nigeria’s Number of Deals (2000-2020)

Figure 5: Trend Analysis of Nigeria’s Number of Deals (2000 - 2020)

The trend analysis suggests that the number of deals in Nigeria has not followed a consistent

pattern over the past two decades. The peak around 2010 might reflect a period of economic

growth or favorable market conditions that led to increased deal activity.

4.2.6. Regression Analysis

Dependent Variable: RGDP

Method: Least Squares
Date: 01/21/24 Time: 10:31
Sample: 2000 2020
Included observations: 21

Variable CoefficientStd. Error t-Statistic Prob.

C 34471.13 3746.233 9.201544 0.0000

MCAP 1.873082 0.253703 7.382958 0.0000
VST 0.004034 0.005039 0.800609 0.4351
ASI -0.277427 0.194539 -1.426078 0.1731
NOD -1.15E-07 0.003169 -3.63E-05 1.0000

R-squared 0.894996 Mean dependent var 51464.96

Adjusted R-squared 0.868745 S.D. dependent var 16637.85
S.E. of regression 6027.739 Akaike info criterion 20.45039
Sum squared resid 5.81E+08 Schwarz criterion 20.69908
Log likelihood -209.7291 Hannan-Quinn criter. 20.50436
F-statistic 34.09388 Durbin-Watson stat 0.783910
Prob(F-statistic) 0.000000

From the regression analysis, the coefficient of MCAP is 1.8731 which means that for every one

unit increase in MCAP, there is a predicted increase of 1.8731 units in RGDP, holding all other

variables constant. The p-value of 0.0000 indicates that this effect is statistically significant. The

coefficient of VST is 0.0040 which is statistically insignificant (p-value of 0.4351), suggesting

that VST does not have a significant impact on RGDP in this model. The coefficient of ASI is -

0.2774 which indicates that for every one unit increase in ASI, there is a predicted decrease of

0.2774 units in RGDP, holding all other variables constant. However, the p-value of 0.1731

suggests that this effect is not statistically significant at the conventional level ( α = 0.05). The

coefficient of NOD is -1.15E-07 which is very small and statistically insignificant (p-value of
1.0000), suggesting that NOD does not have a practical or significant impact on RGDP in this

model.

4.2.7. Cointegration Test

Date: 01/21/24 Time: 11:12

Sample (adjusted): 2002 2020
Included observations: 19 after adjustments
Trend assumption: Quadratic deterministic trend
Series: RGDP MCAP VST ASI NOD
Lags interval (in first differences): 1 to 1

Unrestricted Cointegration Rank Test (Trace)

Hypothesized Trace 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.949440 103.9709 79.34145 0.0002

At most 1 0.652185 47.26376 55.24578 0.2085
At most 2 0.531362 27.19818 35.01090 0.2664
At most 3 0.430710 12.79761 18.39771 0.2539
At most 4 0.104338 2.093653 3.841466 0.1479

Trace test indicates 1 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.949440 56.70713 37.16359 0.0001

At most 1 0.652185 20.06558 30.81507 0.5453
At most 2 0.531362 14.40057 24.25202 0.5512
At most 3 0.430710 10.70396 17.14769 0.3356
At most 4 0.104338 2.093653 3.841466 0.1479

Max-eigenvalue test indicates 1 cointegrating eqn(s) at the 0.05 level

* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values
The cointegration analysis test the null hypothesis which states that there is no cointegration

(long-run relationship) between variables. The null hypothesis is rejected if at least one of the

probability values of the Trace Statistic and Max-Eigen values are less than or equal to 0.05 (that

is, reject H0 if Prob. Value is <= 0.05). The presence of 1 cointegrating equation suggests that a

long-run equilibrium relationship exists among the variables RGDP, MCAP, VST, ASI, and

NOD. This means that even though these variables may drift apart in the short run, they tend to

move together in the long run, maintaining a stable equilibrium relationship.

 CHAPTER FIVE
CONCLUSION AND RECOMMENDATIONS
5.1. Introduction

The objective of this chapter is to present the summary of the findings, conclusion and policy

recommendations. To achieve that, the chapter is divided into four sections. Following this

introduction, section two provides the summary of the findings, section three conclude the study

while section four provide some policy recommendations.

5.2 Summary of Findings

The study examines the relationship between capital market development and economic growth

in Nigeria. The study used annual time series data covering the period of 2000 to 2020. Real

gross domestic product (RGDP) is used as proxy for economic growth (the dependent variable)

while the stock market development variables used are all share index (ASI), value of stocks

traded (VST), market capitalization (MCAP) and number of deals (NOD). The Johansen

Cointegration test, Ordinary Least Square Regression and trend analysis test techniques were

used in the analysis.

The result of the Johansen cointegration test (trace) show the existence of a long run equilibrium

relationship between real GDP and stock market development at 5% level of significance. The

maximum Eigenvalue result shows no conintegration at 5% percent level.

The result of the OLS regression analysis shows there is a positive and significant relationship

between market capilization and the value of stocks traded and real GDP, while there is negative

and significant relationship between all share index and number of deals and real GDP.
5.2. Conclusion

The study concludes based on the findings that there exists a relationship between stock market

development and economic growth in Nigeria during the period under the study. The study also

finds that a causal relationship exists between stock market development and economic growth

in Nigeria. Therefore, the policies that aimed at developing the stock market should be pursued

by the government.

5.2 Recommendations

The findings show that stock market development has a positive relationship with economic

growth. Based on this result the study recommends the following;

i. The Nigeria government should give priority to stock market development by formulating

effective monetary and fiscal policy management and indeed a stable macroeconomic

environment since unstable and inconsistent policies may undermine investors’ confidence.

There is an urgent and rising need to enhance investors’ confidence in order to fuel stock market

gain by putting in place the regulating environment that enjoyed the confidence of investors,

operators and all the users of the capital market regulation. Hence, recommends that there is the

need to stabilize the macro-economic environment to ensure a conducive environment that would

promote investment in the stock market. Again, these capital market regulations must be fair,

with sensible rules that are clear and enforceable.

ii. There is the needed task in increasing the demand for securities is for stock exchange Market

to embark on public enlightenment programmes such as lectures, symposia, workshops and

seminars in order to sensitize the public on the roles of the stock market and benefits they stand

to gain in availing themselves of these opportunities.

iii. The dissemination of market information is another integral part of securities market

development. Since the competition among developing countries to attract foreign capital is very

intense, there is a need to make relentless efforts to disseminate information to potential investors

abroad

iv. Investment instrument in the stock market should be diversified and market capitalization

improved by encouraging foreign direct investment participation in the market.

v. There is a need to invigorate and strengthen the financial market; more companies should be

encouraged to get listed on the floor of the market. Small and medium entrepreneurs should be

allowed to access the market for investible funds given their close affinity with the grass root

funds mobilization ability

5.3. Suggestions for further Research

The study suggests that further studies should be done to investigate the role of stock market in

financing business enterprises in Nigeria. There will be need to investigate the impact of e-

payment adoption on stock market growth in Nigeria. Finally, the future studies in this area

should expand the variables and the period of the study in order to reinforce the findings of the

study.
 REFERENCES

Abbas IO, Pei YX, & Rui Z (2016) Impact of stock market on economic growth evidence: Dar-es

Salaam Stock Exchange – Tanzania. J Fin Acc 4: 321-327.

Adam, J. & Sanni, I. (2005). Stock Market Development and Nigeria’s Economic Growth.

Journal of Economics and Allied Fields, 2 (2), 116-132.

Adebiyi, M.(2005). Capital Market Performance and the Nigerian Economic Growth. In

Oluwatayo, A Olasupo (Eds.): Issues in Money, Finance and Economic Management .

Lagos: University of Lagos. Adekunle OA, Alalade YS, Okulenu SA (2016) Macro-

Economic Variables and Its Impact on Nigerian Capital Market Growth. Int J Econ Bus

Manage 2: 22-37.

Adenuga AO (2010) Stock market development indicators and economic growth in Nigeria:

Empirical investigation. Central Bank of Nigeria, Economic and Financial Review 48: 33-

711.

Adigwe PK, Nwanna IO, & Ananwude A (2015) Stock market development and economic

growth in Nigeria: An empirical examination (1985-2014). J Policy Dev Studies 9: 134-

154.

Afees AS, & Kazeem BA (2010) The stock market and economic growth in Nigeria: An

empirical investigation. J Econ Theory 4: 65-70.

Akingbohungbe, S. (1996) The Role of the Financial Sector in the Development of the Nigerian

Economy Paper presented at a Workshop Organized by Centre for Africa Law and

Development Studies.
 Alajekwu U.B. and Achugbu A. A. (2012); The Role of Stock Market Development on

Economic Growth in Nigeria: A Time Series analysis, Africa Research Review, 6(1), 51-

70.

Alile H.I. (1984); “The Nigerian Stock Exchange Historical Perspective, operations and

contributions to Economic Development” Central Bank of Nigeria Bullion, Silver Jubilee

edition vol. 11 page 65 – 69. 42 Alile Hayford (1997); “Government must Divest” The

business concord of Nigeria, 2nd December, pp. 8. 195 – 209.

Benchivengs V.R. and Smith B.D., and Starr R.M. (1996): Equity Markets, Transaction costs

and Capital Accumulation: An illustration. The World Bank Economic Review vol. 10 241

– 265.

Caporale, Howells and Soliman, (2004); “Stock Market Development and Economic Growth: A

causal linkage, Journal of Economic Development, 29, pp. 30 – 35.

Central Bank of Nigeria’s Economic and Financial Review, September, 43, pp. 2 – 8. Central

Bank of Nigeria’s statistical Bulletin (Various issues)

Chinwuba, O & Amos O.A (2011). Stimulating Economic Development through the capital

Market: The Nigeria Experience.

Johansen, S., Juselius, K., (1990), “Maximum likehood estimation and inference on co-

integration. With application to the Demand for money” Oxford Bulletin of Economics and

Statistics, 52, (169 - 210).

Jorind 9(2) Gujarati, D.N. (2004). Basic Econometrics. New York: Tata MC Graw-Hill.
 Josiah M, Adendiran SA, & Akpeti EO (2012) Capital market as a veritable source of

development in Nigerian economy. J Acc Taxation 4: 7-18.

Kolakpo T, & Adaaramola AO (2012) The Impact if the Nigerian Capital Market and Economic

Growth 1990- 2010”. International Journal of Development societies. Vol 1. No 1, 2012,

11-19

Kolapo, F.T. and Adaramola A.O. (2012). The Impact of the Nigerian capital market on

Economic Growth (1990- 2010). International journal of developing societies, 1(1), 11-19.

Koutsoyrannis, A. (1977). Theory Of Economics. Hamphire Macmillan Education Ltd. London.

Mishkin, Federic S. (2001); “The Economics of Money, Banking and Financial Markets” 6th

Edition, New York; Addison Wesley Longman.

Mishra PK, Mishra US, Mishra BR, & Mishra P (2010) Capital market efficiency and economic

growth: The case of India. European J Econ Fin Admin Sci 27: 130-138.

Okonkwo VI, Ananwude AC, & Echekoba FN (2015) Nigeria stock market development and

economic growth: A time series analysis (1993 – 2013). Scholars J Econ Bus Manage 2:

280-293.

Olawoye O (2011) Impact of Capital Market on Economic growth of Nigeria. Internet Blog, Dec

11, 2011. Olowe, O., Mathew, O. and Fasina F. (2011); Nigerian stock Exchange and

Economic Development, knowledge Management, Information Management Learning

Management,14, 14-37
Osakwe CI, & Ananwude A (2017) Stock market development and economic growth: A

comparative evidence from two emerging economies in Africa – Nigeria and South Africa.

Archives Current Res Int 11: 1-15.

Osunbi, T.S. (1998); “Stock Market Development and long-run growth in Nigeria Unpublished

M.S.C Economics dissertation, University of Ibadan Nigeria.

Owolabi, A. and Ajayi, N. O. (2013); Econometric Analysis of Impact of Capital Market on

Economic Growth in Nigeria (1971-2010), Asian Economic and Financial Review, 3(1),

99-110

Sule, O.K. & Momoh, O.C. (2009), ‘’The Impact of Stock Market Earnings on Nigeria per

Capita Income’’, African Journal of Accounting, Economics, Finance and Banking

Research, Vol. 5 No. 5, pp. 77-89.

 APPENDIX

YEAR RGDP MCAP VST ASI NOD

2000 23,688.28 472.30 28,153.10 8,111.00 256,523

2001 25,267.54 662.50 57,683.80 10,963.10 426,163

2002 28,957.71 764.90 59,406.70 12,137.70 451,850

2003 31,709.45 1,359.30 120,402.60 20,128.94 621,717

2004 35,020.55 2,112.50 225,820.00 23,844.50 973,526

2005 37,474.95 2,900.06 262,935.80 24,085.80 1,021,967

2006 39,995.50 5,120.90 470,253.40 33,189.30 1,367,954

2007 42,922.41 13,181.69 1,076,020.40 57,990.20 2,615,020

2008 46,012.52 9,562.97 1,679,143.70 31,450.78 3,535,631

2009 49,856.10 7,030.84 685,717.29 20,827.17 1,739,365

2010 54,612.26 9,918.21 799,910.95 24,770.52 1,925,314

2011 57,511.04 10,275.34 638,925.70 20,730.63 1,235,467

2012 59,929.89 14,800.94 808,994.18 28,078.81 1,147,616

2013 63,218.72 19,077.42 2,350,875.70 41,329.19 3,245,866

2014 67,152.79 16,875.10 1,338,600.65 34,657.15 2,248,939

2015 69,023.93 17,003.39 978,047.07 28,642.25 950,001

2016 67,931.24 16,185.73 620,018.05 26,874.62 837,259

2017 68,490.98 21,128.90 1,078,491.84 38,243.19 879,067

2018 69,799.94 21,904.04 1,284,976.28 31,430.50 1,039,333

2019 71,387.83 25,890.22 99,297.04 26,842.07 883,432

2020 70,800.54 26,934.67 1,099,491.84 40,270.72 1,150,515