AN EMPIRICAL ANALYSIS ON THE IMPACT OF STOCK MARKET ON THE NIGERIAN ECONOMIC DEVELOPMENT
A major engine of economic growth and development of any nation is the stock market. It impacts positively on the economy by providing financial resources through its intermediation process for financing long term projects. These projects could be promoted by governments or private institutions. The analysis scope covered a period of twenty-five years spanning from 1986-2013. The econometric methodology adopted is the Ordinary Least square method (OLS). Using the independent variables of market capitalization, value of trade, inflation rate and exchange rate and the dependent variable of gross domestic product, this study analyzes the impact of the stock market on the Nigerian economy. In conclusion, the result shows that the stock market has a highly significant impact on the Nigerian economy. Hence, without an efficient stock market, the economy may be starved of the required long term funds for sustainable growth and development.
1.1.BACKGROUND OF THE STUDY
The stock market is supposed to play an important role in the economy in the sense that it mobilizes domestic resources and channels them to productive investments. However, to perform this role it must have significant relationship with the economy. The development of stock market in Nigeria, as in other developing countries has been induced by the government. Though prior to the establishment of stock market in Nigeria, there existed some less formal market arrangement for the operations of the stock market. It was not prominent until the visit of Mr. J.B. Lobynesion in 1959, on the invitation of the federal government, to advice on the role the central bank could play in the development of the local money and stock market. As a follow-up to this, the government commissioned and set up a Barback committee to study and make recommendations on the ways and means of establishing a stock market in Nigeria as a formal market. (Alile and Anao 1990) Capital markets are key elements of a modern market-based economic system as they serve as the channel for flow of resources from the SAVERS of capital to the BORROWERS of capital. Efficient capital markets are hence essential for economic growth and prosperity. With growing globalization of economies, the international capital markets are also becoming increasingly integrated. While such integration is positive for global economic growth, the downside risk is the contagion effect of financial crisis especially if it sorigin lies in the bigger markets.
As for the effect of macroeconomic variables such as money supply and interest rate on stock prices, the efficient market hypothesis suggests that competition among the profit maximizing investor’s impact of macroeconomics. Variables on stock market will ensure that all the relevant information currently known about changes in macroeconomics variables are fully reflected in current stock market, so that investors will not be able to earn abnormal profit through prediction of the future stock markets investments. (Chong and Koh 2008). Therefore, since investment advisors would not be able to help investors earn above average returns consistently except through access to employer insider information. Stock market is a critical log in the wheel that smoothens the transfer of funds for economic growth. Broadly speaking, stock exchanges are expected to accelerate economic growth by increasing liquidity of financial assets, making global diversification easier for investors and promoting wiser investment decisions. In principle, a well functioning stock market may help the economic growth and development process in an economy through growth of savings, efficient allocation of investment resources and alluring of foreign portfolio investments. The stock market encourages savings by providing the household having investable funds, an additional financial instruments which meets their risk preferences and liquidity needs better, it in fact provides individuals with relatively liquid means for risk sharing in investments projects.(Agrawalla 2006). The stock markets capacity to contribute to the development of the economy has be