CHAPTER ONE

1.0 INTRODUCTION

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)

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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 itsorigin 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 thatinvestors will not be able to earn abnormal profit through

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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

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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 been largely impaired by various inadequacies. The

market over the years have been characterized by-Lack of depth with

few securities-poor liquidity partly due to inefficiency-Poor

infrastructural for secondary market operations-Basically an equity

market with largely dormant bond market-High transaction costs-Lack

of sophisticated product investments and instruments. The market is

mainly dominated by traditional instruments such as BONDS and

EQUITIES with limited derivatives-Unfavorable tax regime-Unstable and

largely in appropriatein macro-economic environment.

1.2 STATEMENT OF THE PROBLEM

InNigeria the capital markets have over the years been performing its

traditional role. However its efficiency and effectiveness in this regard

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have been greatly limited by various factors notable among which are

price level and the structure of the economy which is dominated by oil

production yet the oil producingcompanies are listed on the stock

market the lack of long term capital in the business the business

sector depends mainly on short-term financing such as overdrafts to

finance even long term-capital. The economic reforms of the federal

government particularly those that have taken place in the financial

sector are therefore intended among other objectives to attain. The

focus of this paper is to examine stock market and it’s impact on the

Nigerian economy.

As a result of the above the market has therefore not been in the

best position to contribute maximally to economic growth and the real

sector. These inadequacies have made the reforms that have taken

place over the years imperative. Recent reforms in stock market with

the enactments of the Investments and SecurityAct (ISA) no 45 of 1999

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which replaced the SEC degree of 1986. Other reformsthat have been

taken place in the stock market include:

-Review of minimum capital requirement for operators.

-Reduction of transaction costs.

-Introduction of code of corporate governance.

-Reactivation of the Bond market.

-Introduction of market makers.

-Introduction of self registration.

-Development of a commodity market.

Many emerging stock markets are being restricted by lot complaints

which impede the realization of capital market serving as a catalyst for

economic growth. Such problems include:

A.Unquoted companies: Many companies are not quoted because of

perceived loss of control. They are afraid of sharing the ownership of

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the company with others and because of this reason they prefer to

restrict themselves to funds provided by family members and friends

and are therefore unable to unanticipated challenges in a timely

manner.

B. Domination of public sector: The dominance of public

sector like government s has greatly hindered the capital market

growth as many them are yet to be privatized(especially the public

utilities)that can deepen the market almost immediately.

C. A lot of sharp practices exist in the flow of the exchange

fostering improper disclosure of information unfairpricing insider

dealings e.t.c

Currently the performance of the Nigerian stock market during the

last month rallied 118 points or 7.3%. from 2013 the Nigerian stock

market average 1106 index points reaching an all time-high of 1718

index point in may 2013 and a record of 848 index points (NSE 30).

This rise and fall of the Nigerian stock market index point has resulted

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in the slow meltdown of the capital market. This meltdown of the

capital market could result in unbalances on the economy.

According to the NSE report the process of this rise and fall began

in January 2007 as the capital market nose-dived from all time high of

₦13.5 trillion to less than ₦4.6 trillion by the second week of January.

The all share index has also plummeted from abroad 66000 basis

points to less than 22000 points in the same period. It has also

experienced a free for all downward movement with more than 60%

of 300 quoted stocks. Consequently many of the quoted stocks lack

liquidity as their holders are trapped not able to convert to cash to

meet their domestic needs thereby creating a major problem. When

this occurs stockholders begin to withdraw and foreign investments

are lost and this results to a negative developmenton the Nigerian

economy.

1.3 OBJECTIVES OF THE STUDY

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The central objective of this study is to analyze the economic

impact of stock market on Nigerian economy. The specific objectives

include;

1. To examine the relationship between stock market and

Nigeria’sgross domestic product.

2. To assess the level of stock market stability in Nigeria.

3. To appraise the performance of the Nigerian stock market.

4. To make policy recommendations at the end of this study.

1.4 RESEARCH HYPOTHESIS

The research work is guided by the following hypothesis.

1. Ho: There is no significant relationship between stock market and

Nigeria’s gross domestic product.

H1: There is a significant relationship between stock market and

Nigeria’s gross domestic product.

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2. Ho: Stock market does not have economic impact on the Nigerian

economy.

H1: Stock market has economic impacts on the Nigerian economy.

1.5 SIGNIFICANCE OF THE STUDY

The general relevance of the study lies in its understanding of the

Economic Impact of Stock Market on Nigerian economy and so will be

particularly relevant in the following areas.

A. In particular by using Nigeria stock market as empirical evidence

the research will provide quantitative information which will enable us

to ascertain whether or not stock price fluctuations have impact on

the Nigerian economy. The finding of the study will reveal or will

therefore be relevant to the government and policy makers in fine-

tuning stock market policies that will be applied to ascertain

sustainable in the Nigerian stock market.

B. Also it will relevant to the stock market operators monetary

institutions or authorities and regulating agencies to harness and fine-

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tune stock market prices to promote high performance level especially

at this critical moment of global economic crises and the nation’s

economic circumstances.

C. The findings if the study will equally afford quoted companies the

stock opportunity to assess whether or not they have been

performing well in terms of price stability.

D. Finally a further justification for the study is the benefit of

applying the economic analysis of the impact of stock market in

Nigeria to economic and financial analysis kits and increases the stock

of knowledge in both the stock market and the Nigerian economy.

1.6 SCOPE AND LIMITATIONS OF THE STUDY

This work is a study of economic impact of stock market on the

Nigerian economy. The study employs empirical evidencefrom both

stock market using the Nigerian stock exchange and Nigerian economy

as whole. The choice is made out of the researcher’s interest in the

given country’s stock market and economic circumstances. The period

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covered by the research is twenty-five (24) years period 1986-2010. The

availability of uniform data on the variables informed the researcher’s

choice of the period of analysis.

This study is limited by the following factors;

1. Paucity of materials: Materials for the study were not adequate

which could not allow for an in-depth study.

2. Inaccessibility of data: Difficulty in accessing data for the study

was yet another limitation.

3. Financial constraint: Lack of adequate funds on the part of the

researcher constituted another problem.

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