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AN EMPIRICAL INVESTIGATION OF THE IMPACT OF INFORMATION

TECHNOLOGY ON GLOBAL CAPITAL MARKETS OPERATION

Article · April 2015

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 Journal of Applied Management Science

AN EMPIRICAL INVESTIGATION OF THE IMPACT OF

INFORMATION TECHNOLOGY ON GLOBAL

CAPITAL MARKETS OPERATION

Anyiam Kizito1, Oluigbo Ikenna2, Eze Udoka3, Ezeh Gloria 4

1-4
Department of Information Management Technology, Federal University of Technology Owerri, Imo State,

Nigeria.

Abstract

This study evaluates the impact of Information Technology on global capital markets operation with

particular reference to the equity markets using a simple percentage and multiple regression analyses. The

data in the study were collected from WFE, IMF, WEO from 2001 to 2010 for some selected developed

and emerging markets, and also through a structured questionnaire. Equity market developments and its

indicators as a whole were regressed against ICT developments indicators (i.e. telecommunication

industry, internet technology, computer and regulatory industry and cloud computing technology). Using

equity markets development as the dependent variable, the results disclose that there is a positive

relationship existing between the dependent variable and the independent variables. Information

Technology have contributed to the growth of the global equity markets, with the effects mostly reflected

in the aggregates of the equity markets indicators. It is recommended that market regulators in the

emerging economies expand and deepen their capital markets system by introducing state of the art

technology.

Keywords: Information Technology, Capital Markets, Markets Operation, Equity Markets, Market

Indicators

1. Introduction

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Technology is fundamentally changing the landscape of the global financial marketplace by lowering

transaction costs and reducing asymmetric information, thus leveling the playing field for investors and

issuers. The rise of internet and the explosive pace of consolidation of exchanges are creating an

increasing round-the-clock borderless global trading network. This has greatly increased the number of

investment products accessible to international investors, improved market efficiency and reduced

transaction costs. Being a portal in this global trading network has become a critical factor for success

(Cheung, 1999)

The effect of information and communication technology (ICT) on the growth and development of capital

markets has been a subject of debate in recent times.

A school of thought led by authors like (Shiller 1989, Summers 1988, and Porteba et al. 1988) would

argue that capital markets have become excessively volatile since the adoption of computer assisted

trading strategies as the latter increase short-term price volatility and risks. They also argue that very few

investors have access to online trading systems. Few actually own computers and have easy access to the

Central Securities Clearing System (Bhunia, 2011). Many investor, they claimed, do not have access to a

system that sends orders to stockbrokers for automated execution. They also contend that ICT driven

capital market operations are fraught with fraud and manipulation, which mostly affect individual

investors.

The second school of thought, which includes authors (Fama et al. 1988), on the other hand, argued that

information technology have made capital markets more efficient as attendant stock prices now reflect

important information and investors perception of stocks more swiftly. In their contention, ICT has made

the capital market more efficient by providing all participants with faster and more effective means of

exchanging information. They maintained that new products and instruments have been made readily

available as a result of the advent of sophisticated ICT. Evidently, capital markets can be more resilient,

possess greater depth and breadth with the intervention of ICT (Bhunia, 2011).

1.1 Objectives of the Study

The specific objectives of this study include:

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1. To evaluate the role of Information Technology on the growth of global capital markets.

2. To investigate how Information Technology can benefit investors by allowing then to diversify

their holdings internationally and to raise short, medium and long term capital in the global

capital market place which could be used to execute a particular project.

3. To make policy recommendations based on findings of this study.

2. Research Questions

This research shall be guided by the following questions:

1. What are the relevant ICT development indicators that have contributed towards the growth of the

global equity markets?

2. To what extent have these ICT development indicators as a whole contributed to the growth of

the global equity markets?

3. To what extent has each ICT development indicators contributed to growth of the global equity

markets?

4. What are the factors behind the rapid globalization of equity markets?

5. What are the challenges confronting the globalization of equity market?

6. What policy recommendations can be made on the basis of findings of this study?

2.1 Statement of the Hypothesis

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

H01: There is no significant impact of telecommunication industry on global equity markets operation.

HA1: There is significant impact of telecommunication industry on global equity markets operation.

H02: There is no significant impact of internet technology on global equity markets operation.

HA2: There is significant impact of internet technology on global equity markets operation.

H03: There is no significant impact of computer and regulatory industry on global equity markets

operation

HA3: There is significant impact of computer and regulatory industry on global equity markets operation

H04: There is no significant impact of cloud computing technology on global equity markets operation

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HA4: There is significant impact of cloud computing technology on global equity markets operation.

3. Theoretical Framework

3.1 Developments and Globalization of Capital Markets

Capital markets in developed countries have grown substantially over the past three decades, experiencing

a large boom in the 1990s. As part of this process, companies raised more capital in bond and equity

markets, while both retail and institutional investors increased their participation in those markets.

Financial markets experienced such a robust expansion that by 2004 the combined credit to the private

sector by financial institutions, stock market capitalization, and private bonds outstanding reached an

average of over 260 percent of GDP for G-7 countries, compared with about 100 percent in 1975.

3.2 The Role of Information Technology in the Growth of Global Capital Markets

Technology is driving the transformation of the global financial marketplace. There are different facets of

technology that have contributed to the emergence of an increasingly interrelated global marketplace with

strong linkages between cash and derivative markets.

These advances in technology can be grouped into four categories namely:

1. Telecommunication Industry

2. Internet Technology

3. Computer and Regulatory Industry

4. Cloud Computing Technology

3.2.1 Telecommunication Industry

Advances in telecommunications and information processing offer financial institutions the capability in

handling vast amount of data at very high speed and at relatively low costs.

The use of satellite based communication system in remote areas enable stock exchanges to detect market

abuses at a nascent stage, improve risk management system and strengthen the self-regulatory

mechanisms. The use of mobile applications that provide market data in real time to financial institutions

and individual investors have contributed to easy accessibility of market information.

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3.2.2 Internet Technology

The emergence of the Internet is reducing information asymmetry, giving individual investors

unprecedented access to the global marketplace. Smaller investors are gaining access to real-time market

information and low-cost trading and risk management systems which have until recent years been largely

accessible by financial institutions. Technology has leveled the playing field for all investors around the

world (Cheung, 1999)

3.2.3 Computer and Regulatory Industry

Accessing the global markets has been facilitated by electronic trading platform which features a set of

integrated software modules and a central database that enables data to be shared by many different

business processes and functional areas throughout an enterprise. This platform enables investors to have

access to the wide varieties of investment products in the global capital market place with a click of

mouse.

3.2.4 Cloud Computing Technology

Although the actual definition of cloud computing remains, well, cloudy, an exclusive. Wallstreet (2010)

study reveals that capital markets firms are using the technology to cut costs, achieve scale and improve

time to market. Perceived cost savings, ease of scaling-in and scaling-out, faster time to market for

deploying systems and the ability to access data and applications on the move are all critical consideration

factors that can drive financial services firms to adopt cloud computing (Garg, 2011).

3.3 An Assessment of the Adoption of ICT by the Nigerian Stock Exchange (NSE)

Before now it took longer time for a transaction to be completed on the floor of the Nigerian Stock

Exchange (NSE), ICT have revitalized the operations of the exchange. Some typical examples are as

follows:

1. Introduction of the Central Securities Clearing System Limited (CSCS)

2. Introduction of trade alert

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3. Launching of official websites (www.nigerianstockexchange.com and

www.nigerianstockexchange.biz) for proper awareness and enlightenment of the general public as

to the activities of the exchange.

4. The adoption of screen based trading technology

4. Research Methodology

4.1 Sampling Design and Procedure

The data obtained from the secondary sources were used to conduct a thorough analysis of the

performances and trends of the global equity markets in the samples. The samples were divided into

developed and emerging markets. The study selected ten (10) developed markets and ten (10) emerging

markets for the purpose of the analysis.

The selected developed markets in the sample include: Australian Securities Exchange, Deutsche Borse,

Irish Stock Exchange, Borsa Italiana, New Zealand Exchange, Oslo Bors, NASDAQ OMX Nordic

Exchange, Six Swiss Exchange, London Stock Exchange Group, and the New York Stock Exchange

Euronext (US).

The Indonesia Stock Exchange, Tel- Aviv Stock Exchange, Bursa Malaysia, Mexican Exchange,

Phillipine Stock Exchange, Warsaw Stock Exchange, Johannesburg Stock Exchange, Taiwan Stock

Exchange and the Istanbul Stock Exchange were among the selected stock exchanges included in the

emerging markets sample.

These markets were included in the study sample based on up-to-date availability of market data during

the study period under review.

However, from the review of literatures an instrument was developed with the aim of covering the basic

research objectives regarding the survey in mind.

The selected clusters in this study include:

1. Telecommunication Industries

2. Commercial Banks

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3. Investment Banks/Stock Broking Firms

4. Government Service/Regulatory Agencies

5. Internet and other Service Providers

They were selected because the researcher felt that the clusters were large enough to represent the

population and embrace the technical information the researcher was seeking to obtain.

4.2 Methodology and Data Collection

This study employed secondary data obtained from the World Federation of Exchanges (WFE), the

International Monetary Fund (IMF), and the World Economic Outlook (WEO) database April 2012 and

from the relevant literatures (books, journals, previous research paper and electronic sites). The time

series data cover the period 2001-2010. The secondary data were used to analyze the performance of the

global equity markets within this study period.

A well-structured questionnaire was specifically designed and distributed to accomplish the research

objectives. A total of one hundred and forty (140) structured questionnaires designed on the Likert Five

Points Scale were administered. Out of these, eighty-four (84) were returned with a response rate of 60%,

six (6) were discarded because they contained errors such as incomplete answers and inconsistence.

Seventy- eight questionnaires (56%) were found suitable for the analysis.

4.3 Method of Data Analysis

Analyses of data collected were carried out using simple percentage and multiple regression analyses. In

the analysis, Developments of Global Equity Markets and its Indicators as a whole were regressed against

ICT Developments Indicators which are: Telecommunication Industry, Internet Technology, Computer

and Regulatory Industry, and Cloud Computing Technology.

F-test was used in determining level of significance while t-test was used to test for level of significance

of each individual factor.

In multiple regressions, the model describing the relationship between the dependent variable and a set of

independent variables can be expressed as:

Y = α + β1X1 + β2X2 + β3X3 + β4X4 … … … (1)

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Where: α, β1, β2, β3, and β4 are the unknown parameters to be estimated

Y = Developments of Global Equity Markets and its Indicators = Dependent Variable

X1 = Telecommunication Industry = Independent Variable

X2 = Internet Technology =Independent Variable

X3 = Computer and Regulatory Industry = Independent Variable

X4 = Cloud Computing Technology = Independent Variable

The necessary sums of squares, degrees of freedom, mean squares and variance ratio for multiple

regressions are summarized in the ANOVA table below.

Table 1: Anova Table for Multiple Regression

Source of Sum of Squares (SS) Degree of Mean Square F- Ratio

Variation Freedom

Regression SSR = R2∑Y2 K MSR = SSR F = MSR

K MSE

Error SSE=∑Y2-R2∑Y2 n-K-1 MSE = SSE

n - K-1

Total SST=∑Y2 – (∑Y)2 n-1

Source: (Nworuh, 2014).

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The total deviation on each observation Yi from the mean (Yi-Y) can be expressed as the sum of its

explained and unexplained variations.

∑ (Yi-Y) 2 = (∑Yi2-(Y) 2 + ∑Yi2-∑Y2)2... … … (2)

SST = SSR + SSE

Where ∑ Yi2-(Y) 2 = Explained Variable

∑ Yi2-∑Y2 = Unexplained Variable

SST = ∑ Yi2-(Y) 2/ n … … … (3)

SSE = ∑ Yi2-∑Y2 = SST – SSR … … … (4)

5. Research Findings and Interpretation

5.1 Model Estimation and Hypothesis Testing

In estimating the model of relationship, the data collected were subjected to multiple regression analysis.

The result obtained from the multiple regression analysis is shown in tables 2, table 3 and table 4 below:

Table 2: Model Summary

Change Statistics

Adjusted R Std. Error of R Square Sig. F

Model R R Square Square the Estimate Change F Change df1 df2 Change

1 .509a .259 .219 3.62197 .259 6.390 4 73 .000

a. Predictors: (Constant), CLOUDCOMP, INTERNET, TELECOMM, COMPREG

i. The Coefficient of Correlation (R) shows the degree or extent of relationship between the

dependent and the independent variables. The value 0.509 in table (4.1) shows the existence of a

positive relationship between these variables.

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ii. The Coefficient of Determination (R2) revealed that about 25.9% (0.259) of the variations in the

dependent variable are attributable to variations in the independent variables.

iii. The Adjusted Coefficient of Determination (R2 Adjusted) which is 0.219 implies that the actual

variation is 21.9% as against 25.9% suggested by normal R2.

iv. The F-change (F-ratio) shows the overall significance of the model and evaluates the fitness of

the model. The model is significant because the calculated F-ratio of 6.390 is greater than the

table value of 2.53 at 5% level of significance.

Table 3: ANOVAb

Model Sum of Squares Df Mean Square F Sig.

1 Regression 335.324 4 83.831 6.390 .000a

Residual 957.664 73 13.119

Total 1292.987 77

a. Predictors: (Constant), CLOUDCOMP, INTERNET, TELECOMM, COMPREG

b. Dependent Variable: EQUITYMKT

Table 4: Coefficientsa

Unstandardized Standardized 95.0% Confidence

Coefficients Coefficients Interval for B

Lower Upper

Model B Std. Error Beta t Sig. Bound Bound

1 (Constant) 20.160 5.462 3.691 .000 9.276 31.045

TELECOMM .099 .245 .047 .403 .688 -.389 .587

INTERNET .424 .155 .282 2.746 .008 .116 .732

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COMPREG -.094 .233 -.053 -.405 .687 -.559 .370

CLOUDCOMP .579 .184 .387 3.140 .002 .211 .946

a. Dependent Variable: EQUITYMKT

In table 3.0, the major interest of the researcher will most likely be focused on the value in the "Sig."

column. If the value(s) is/are less than the critical value ( ) 0.05, then the effect is said to be significant;

else, it will result in a non-significant effect.

In table 4.0, the t and p (sig) values shows the impact of the independent variables on the dependent

variable. From table 4.0, it is clear that Cloud Computing Technology had the highest impact on overall

satisfaction (the independent variables), achieving a ß of 0.579 .The large t-value and corresponding low

p-value (Sig.) buttressed the result for Cloud Computing Technology which had the highest Beta

coefficient (both for standardized and unstandardized), followed by Internet Technology (ß=0.424),

Telecommunication Industry (ß=0.099) and Computer and Regulatory Industry (ß=0.094).

Using the regression output in table 4.0, we estimated the following equation.

Y=20.160 + 0.99 X1 + 0.424X2 - 0.094X3 + 0.579X4 … … … (2.0)

Equation 2.0 shows that the relationship existing between equity market development and the four

explanatory variables (X1, X2, X3 and X4) are strong.

5.2 Test of Hypothesis

Decision Rule: Accept the null hypothesis (H0) if the critical tabulated value is greater than the calculated

value, otherwise reject. The rejection of the null hypothesis (H0) means the automatic acceptance of the

alternate hypothesis (HA). The level of significance (α) is set at 0.05.

1. To test for the Impact of Telecommunication Industry on global equity markets operations: since t

calculated (0.403) < t tabulated (1.667), we accept H01 and reject HA1 and conclude that

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telecommunication industry has no significant impact statistically on global equity markets

operation.

2. To test for the impact of internet technology on global equity markets operations: since t

calculated (2.746) > t tabulated (1.667), we reject H02 and accept HA2 and conclude that internet

technology has significant impact statistically on global equity markets operation.

3. To test for the impact of computer and regulatory industry on global equity markets operations:

since t calculated (-0.405) < t tabulated (1.667), we accept H03 and reject HA3 and conclude that

computer and regulatory industry has no significant impact statistically on global equity markets

operation.

4. To test for the Impact of cloud computing technology on global equity markets operations: since t

calculated (3.140) > t tabulated (1.667), we reject H04 and accept HA4 and conclude that cloud

computing technology has significant impact statistically on global equity markets operation.

5.3 Discussion of Results

With reference to research questions, hypothesis testing, and responses from industry professionals, the

researchers discussed the following result:

5.3.1 Question one: What are the relevant ICT developments indicators that have contributed towards the

growth of the global equity markets?

From the results in table 4.0, only the coefficient of the computer and regulatory industry had a negative

value. This implies that, telecommunication industry, internet technology, and cloud computing

technology was more relevant compared to computer and regulatory industry.

5.3.2 Question Two: To what extent have these ICT development indicators as whole contributed to the

growth of the global equity market?

The test of hypothesis shows that ICT development indicators as a whole impacted significantly on global

equity markets operation. The conclusion was drawn from the result of the F test in which F-calculated

value of 6.390 is greater than the F-tabulated value of 2.53 at 5% significance level.

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5.3.3 Question Three: To what extent has each ICT development indicators contributed to the growth of

the global equity markets?

For proper evaluation to the extent of contribution of each ICT development indicators on global equity

market operation, it is necessary that the question be broken down into sub-questions as follows:

i. To what extent has telecommunication industry contributed to the growth of the global equity

markets?

The test of hypothesis shows that telecommunication industry is insignificant to the growth of the

global equity markets since the probability value 0.688 of telecommunication industry is greater

than the 0.05 level of significance.

Contrary to the above insignificant impact, industry professionals perceived that

telecommunication industry has contributed to the growth of the global equity markets.

ii. To what extent has internet technology contributed to the growth of the global equity market?

The test of hypothesis shows that internet technology is significant to the growth of the global

equity markets since the probability value 0.008 of internet technology is less than 0.05

significance level. This result is also in tandem with stakeholder’s perception that internet

technology has contributed to the growth of the global equity markets.

iii. To what extent has computer and regulatory industry contributed to the growth of the global

equity markets?

The test of hypothesis on this research question shows that computer and regulatory industry is

insignificant to the growth of the global equity markets since the probability value 0.687 of

computer and regulatory industry is greater than the 0.05 level of significance.

Contrary to the above insignificant impact, the feedback received from the industry professionals

shows that computer and regulatory industry has contributed to the growth of the global equity

markets.

iv. To what extent has cloud computing technology contributed to the growth of the global equity

markets?

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The test of hypothesis on this research question shows that cloud computing technology is

significant to the growth of the global equity markets since the probability value 0.002 of cloud

computing technology is less than the 0.05 significance level. This is also in alignment with

industry professional’s perception that cloud computing technology has contributed to the growth

of the global equity markets.

5.3.4 Question four: What are the factors behind the rapid globalization of capital markets?

With reference to table 1.0, the coefficient of correlation ( R) reveals the degree of dependency of the

dependent variable (equity markets developments and its indicators) to the independent variables (ICT

development indicators). The value of 0.509 (50.9%) shows the existence of a positive relationship

between these variables.

Empirically speaking, this value shows a fairly degree of dependency of the dependent variable to the

independent variables.

This study however presumes that, the fairly degree of dependency is due to the fact that technology alone

is not the only factor affecting the globalization of capital markets. Other factors as identified by this

study such as financial liberalization, deregulation of capital markets and a growing dedicated investor

base are equally determinants factors towards the globalization of capital markets.

This is evidently supported by the feedback received from the industry professionals.

5.3.5 Question five: What are the challenges facing the globalization of capital markets?

Respondents perceived security issues, performance and dissemination of false information as some of the

threats associated with internet technology, which could be a major challenge to the globalization of

capital markets.

However, this study also identified the integration of capital markets due to advances in information

technology as another challenge facing the globalization of capital markets.

For instance, a move seen in a stock market triggered by a particular event in economy A, can easily

affects that of other stock markets in economies B, C, D etc within seconds.

6. Conclusion

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6.1 Summary of Findings and Conclusion

This study utilized a simple percentage and multiple regression analyses to evaluate the impact of

information technology on global capital markets operation with particular reference to the equity

markets. The results reveal the following important findings:

1. Using equity markets development and its indicators as the dependent variable, the results show

that the ICT development indicators as a whole have contributed towards the growth of the global

equity markets since the F-value is significant at 5% level.

2. It was discovered that the telecommunication industry had positive but insignificant impact

statistically to the growth of the global equity markets.

3. However, the internet technology was positively signed and also statistically significant to the

growth of the global equity markets operation.

4. On the other hand, the computer and regulatory industry had a negative influence and statistically

insignificant to the growth of the global equity markets.

5. It was also noted that, the adoption of cloud computing technology by capital market operators

had a positive impact and also statistically significant to the growth of the global equity markets.

Based on the above findings of the study, we can conclude that the global equity markets have grown

substantially over the years within the study period under review as reflected in aggregates such as

number of companies listed domestically, domestic market capitalization, domestic value traded and

domestic turnover velocity. This is attributed to the level of developments in ICT in the form of

telecommunication industry, internet technology, computer and regulatory industry and the adoption of

cloud computing technology by capital markets operators as identified by this study.

References

Cheung, S. (1999), “Information Technology, Financial Flows and Globalization”, 1-4.

Shiller, R. (1989), “Market Volatility”, Journal of Finance, 42, pp. 623 – 655.

Summers, L. (1988), “Does the Stock Market rationally reflect fundamental values?” Journal of Finance,

41, pp. 591-601.

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Porteba J., and Summers, L. (1988), “Mean Reversion in Stock Prices: Evidence & Implications”,

Journal of Financial Economics, 22, pp. 27-59.

Bhunia, A. (2011), “The Impact of ICT on the Growth of Capital Market-Empirical Evidence from Indian

Stock Exchange”. Information and Knowledge Management, Vol 1, No.2

Fama, E., & French, K. (1988), “Dividend Yields and Expected Stock Returns”, Journal of Financial

Economics, 22: 3-25.

Wallstreet and Technology, (2010), 1-2; http://www.wallstreetandtech.com

Garg, A. (2011), “Cloud Computing for the Financial Services Industry” 5-10.

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http://www1.migbank.com/brochure/#/14/

http://www.saxobank.com/trading-accounts

http://www.wfe.org

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