CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Stock Market is viewed as a medium to encourage

savings help channel savings into productive

investment and improve the efficient and productivity of

investment. The emphasis on the growth of stock

markets for domestics‘ resource mobilization has also

been strengthened by the need to attract foreign capital

in non-debt creating forms. A viable equity market can

serve to make the financial system more competitive

and efficient. Without equity markets companies have

to rely on internal finance through retained earnings.

Large and well established enterprises are in a privileged

position because they can make investment from

retained earnings and bank borrowings while new

companies do not have easy access to finance. Without

being subjected to the scrutiny of the stock market big

firms get bigger and for the emerging smaller

companies retained earnings and fresh cash injections

10

from the controlling shareholders may not be able to

keep pace with the needs for more equity financing

which only an organized market place could provide.

The corporate sector would also be strengthened by the

requirements of equity markets for the development of

widely acceptable accounting standards disclosure of

regular adequate and reliable information. While

closely held companies can camouflage poor investment

decisions and low profitability at least for a while public

held companies cannot afford this luxury. The

availability of reliable information would help investors

make compares‘ of the performance and long term

prospects of companies; corporations to make better

investment and strategic decisions; and provide better

statistics for economic policy makers.

Success in capital accumulation and mobilization for

development varies among nations but it is largely

dependent on domestic savings and inflows of foreign

capital. Therefore to arrest the menace of the current

economic downturn effort must be geared towards

11

effective resource mobilization. It is in realization of this

that consideration is given to measure the development

of capital market as an institution for the mobilization of

finance from the surplus sectors to the deficit sectors.

Levine (1991) showed a positive relation between

financial stock market and economic growth by issuing

new financial resources to the firms. The financial stock

market facilitates higher investments and the allocation

of capital and indirectly the economic growth.

Sometimes investors avoid investing directly to the

companies because they cannot easily withdraw their

money whenever they want. But through the financial

stock market they can buy and sell stocks quickly with

more independence. An efficient stock market

contributes to attract more investment by financing

productive projects that lead to economic growth

mobilize domestic savings allocate capital efficiently

reduce risk by diversifying and facilitate exchange of

goods and services (Mishkin 2001; and Caporale et al

2004).

12

1.2 Statement of the Problem

There is abundant evidence that most Nigerian

businesses lack medium and long –term capital. The

business sector has depended mainly on short-term

financing such as overdrafts to finance even long-term

investment. 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 and Levine 1996). Most recent

literatures on the Nigeria Capital Market have recognized

the tremendous performance the market has recoded 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 deficiency of finance to the economy constitutes a

13

major setback to its development. As a result it is

necessary to evaluate the Nigerian capital market.

1.3 Research Questions

In the light of the research problems this study

attempts to answer the following:

1. Does stock market have a significant effect on

economic growth?

2. Does investment have a significant effect on

GDP?

3. What is the causality between stock market and

economic growth?

1.4 Objectives of the Study

The broad objective of this study is to examine the role

that the stock market plays in the growth process of the

Nigerian economy.

However the specific objectives are as follow:

1. To determine the nature of relationship between

stock market and economic growth.

2. To examine the determinants of investment in

the stock market.

14

3. To determine the causality between stock market

and economic growth.

1.5 Hypotheses of the Study

1. Ho: That the capital market has a negative

relationship with economic growth.

2. Ho: portfolio Investment in Nigeria is not a

determinant of economic growth.

3. Ho: There is no causal relationship between stock

market and economic growths.

1.6 Significance of the Study

The study will explore the effectiveness of capital

market instruments on Nigerian economic growth.

Though the scope of study will be limited to the capital

market 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

15

recommendations to policy – makers on ways to improve

operations and activities of the capital market.

1.7 Scope of the Study

The economy is a large component with lot of

diverse and sometimes complex parts; this research

work will only look at a particular part of the economy

(the financial sector). This work will not cover all the

facts that make up the financial sector but shall focus

only on the capital market and it role as it impacts on

the Nigerian economic growth. The empirical

investigation of the role of the capital market on the

economic growth in Nigeria shall be restricted to the

period between 1980 and 2010 a period of thirty (30)

years.