Capital Market Development and Nigeria Economy

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

The financial system in any economy plays significant role in stimulating economic
growth and development. It channels funds efficiently to various economic agents that need
them for productive uses. This function is very important for economic growth and
development because it creates and makes link between the surplus and deficit units of an
economy. The financial system provides this basically through the activities in the financial
market. The capital market which is a subset of the financial market provides an avenue for
the efficient channeling of long term funds (idle funds) to the users of funds for investment
uses from the savers of fund.

The other subset being money market, serves as a medium through which short term fund are
channeled. Capital market is a collection of financial institutions set up for the granting of
medium and long term loans. It is a market for government. In this market, lenders (investors)
provide long term funds in exchange for long term financial assets offered by borrowers. The
market encompasses of two arms; the primary market which creates a medium for long-term
fresh funds to be raised through the issuance of new financial securities, and, secondary
market which provide opportunities for the sale and purchase of existing financial securities
that have already been traded in the primary market, among investors thereby encouraging
investment in financial securities and boosting economic growth.

The financial system in any economy plays significant role in stimulating economic
growth and development. It channels funds efficiently to various economic agents that need
them for productive uses. This function is very important for economic growth and
development because it creates and makes link between the surplus and deficit units of an
economy. The financial system provides this basically through the activities in the financial
market. The capital market which is a subset of the financial market provides an avenue for
the efficient channeling of long term funds (idle funds) to the users of funds for investment
uses from the savers of fund.

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The other subset being money market, serves as a medium through which short term fund are
channeled. Capital market is a collection of financial institutions set up for the granting of
medium and long term loans. It is a market for government. In this market, lenders (investors)
provide long term funds in exchange for long term financial assets offered by borrowers. The
market encompasses of two arms; the primary market which creates a medium for long-term
fresh funds to be raised through the issuance of new financial securities, and, secondary
market which provide opportunities for the sale and purchase of existing financial securities
that have already been traded in the primary market, among investors thereby encouraging
investment in financial securities and boosting economic growth.

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, 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, 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, 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.

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 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 capitalization 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, 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.

The capital market effectively started operations in Nigeria on 5th June, 1961 under the
provision of the Lagos Stock Exchange Act 1961, which transformed into the Nigerian Stock

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Exchange in December 1977 as a result of the review of the Nigerian financial system (CBN,
2007). The Securities and Exchange Commission (SEC) was established in 1979 through the
SEC Act 1979, to regulate the capital market, but it commenced actual operation in 1980. It
took over regulatory functions from Capital Issues Commission, which was established
in1973. Since then, various forms of financial instruments have been issued in the capital
market by new and existing business to finance product development, new projects or general
business expansion.

In the Nigerian context, participant includes Nigerian Stock Exchange, Discount

Houses, Development banks, Investment banks, Building societies, Stock Broking firms,
Insurance and Pension Organizations, Quoted companies, the government, individuals and
the Nigerian Stock Exchange Commission (NSEC). The capital market is therefore very
important to any economy because, it encourages long-term savings which are channeled into
real investment with a view to increase capital stock. According to Ewah, 2009, the main
objectives of establishing the Nigerian capital market is to mobilize savings from various
economic units for economic growth and development, provide adequate liquidity to
investors, widen the ownership base of assets as well as the creation of a buoyant private
sector and provide alternative source of funds for government. Others are to encourage more
efficient allocation of new investments through the price mechanism, encourage more
efficient allocation of a given amount of tangible wealth through changes in the composition
and ownership of wealth, create a built-in efficiency in the operations and allocation in the
financial system to ensure optimal utilization of resources, and promote rapid capital
formation.

The Nigerian capital market has acquired a significant status even though it is relatively small
in scope and operation within the emerging capital market groups (Akinsola, 2007).Despite
the glamorous claims of the growth of the capital market and its contribution to economic
development as a vehicle for the provision of long terms funds for investment and capital
formation within the Nation and the various efforts being made by the various tiers of
government in developing the nation’s economy, the dearth of finance to the major sectors of
the economy, and the uneven allocation of financial resources has continued to pose serious
challenges to the development of the national economy(Ewah, 2009).

Apart from 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

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setback to the economy. Consequently, it is necessary to recognize the market, institutions
and instruments comprising the system to facilitate the efficient production of goods and
services for the well-being of the society, as well as facilitating the transfer and redistribution
of real economic resources from the surplus sector to the deficit sectors for economic growth
and development of the Nation.

1.2 Statement of the Problem

In recent times there has been a growing concern on the role of capital market on economic
growth and thus the capital market has been the focus of economic policies and policy
makers because of the perceived benefits it provides for the economy. The capital market
provides the fulcrum for stock market activities and it is often cited as a barometer of
business direction. An active capital market may be relied upon to measure changes in the
general level of economic activities (Obadan, 1998).

Deducing from the extensive studies on the theoretical expectations on the role of capital
markets on economic growth which have formed the core of normative economics, the capital
market is expected to contribute to economic growth through the transmission mechanisms of
savings mobilization, creation of liquidity, risk diversification, improved dissemination and
acquisition of information, provision of long-term, non-debt financial capital which enables
companies to avoid over-reliance on debt financing, and enhanced incentive for corporate
control amongst others. However, an x-tray on the path of “positive economics” which is
concerned with “what is” rather than “what should be” reveals that the argument in the
literature on the growth effects of capital market has not been adequately resolved.

The linkage between capital market performance and economic growth has often generated
strong controversy among analysts based on their study of developed and emerging markets
(Kolapo and Adaramola, 2012). The determination of the growth of an economy depends on
how efficiently the capital market performs its allocative function of capital. As the stock
market mobilizes savings, concurrently it allocates a larger proportion of it to the firms with
relatively high prospects as indicated by its rate of returns and level of risks (Alile, 1997).

Nevertheless, 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

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capital which in other will have an impact to the economy (Edame and Okoro, 2013). In the
light of the above mentioned facts, the study aimed at appraising the responsiveness of
economic growth to capital market development of Nigerian (1995-2016).

The Nigerian capital market has performed fairly despite the numerous challenges and
problems some of which include: the buy and hold attitude of Nigerians, massive ignorance
of a large population of the Nigerian public of the nature and benefits of the capital market,
few investment outlets in the market, lack of capital market friendly economic policies and
political instability, private sector led economy and less than full operation of recent
developments like the Automated Trading System (ATS), Central Securities Clearing System
(CSC), On-line and Remote Trading, Trade Alerts and Capital Trade Points of the Nigerian
Stock Exchange (Edame and Okoro, 2013). Over the years, the Nigerian capital market has
witnessed increased level of participation both by the private and public investors. The
market has equally attracted the attention and the interest of foreign investors. For instance,
total listed equity increased from194 in 1981 to 247 in 2016 while market capitalization
increased from N5B in 1981 to N16185.5B in 2016. Moreover, volume of transactions
increased from N304.8M in 1981 to N607407M in 2016. In the vein, number of deals
increased from 10199 in 1981 to 837092 in 2016 (Securities and Exchange Commission,
statistical bulletin 2017). Given that one of the functions of capital market is to provide
medium-term and long-term fund in other to stimulate economic growth, these increases in
the activities of the capital market is expected to generate a corresponding increase in the
economic growth of Nigeria. Unfortunately, these increases in the activities of the capital
market have not been able to generate a meaningful growth in Nigeria.

1.3 Objective of the Study

The main objective of this study is to determine capital market development and Nigeria
economy. The other specific objectives are to:

i. To determine if the deficiencies of the capital market affect Nigerian Economy

ii. To establish the effect of the Nigerian stock exchange crisis on Nigerian capital
market

iii. To determine the role of capital market in developing the Nigerian Economy.

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1.04 Research Questions

In pursuit of the research objective of the study, the following research questions have been
formulated.

i. How do the deficiencies of the Nigerian stock exchange affect the Nigerian economy?

ii. How does the crisis in the Nigerian stock exchange affect Nigerian Capital market?

iii. What are the roles of the capital market in developing Nigerian economy?

1.05 Research Hypotheses

The following hypotheses will be tested in this study, the study formulated the following null

hypotheses to guide the study:

H1: The deficiencies of Nigerian stock exchange market do not affect Nigerian economy.

H2: The crises of Nigerian stock exchange negatively affect Nigerian capital market.

H3: Capital Market did not play a significant role in developing Nigerian Economy.

1.3 Significance of the Study

The study explored the impact of capital market instruments on Nigeria economic growth.
Though the scope of the study was 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 recommendations to policy-
makers on ways to improve operations and activities of the capital market. It will also serve
as a reference material for further research.

Stock brokers will acknowledge the elements of capital being raised at the capital market on
behalf of their clients;

It will be relevant to investors both indigenous and abroad who are ready to invest their funds
on the growth of the Nigeria economy at large;

It will provide students of this professional field the knowledge on how capital market could
create an avenue towards the growth of companies in the Nigeria economy;
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It will provide government, regulatory bodies, Security and Exchange Commission the
knowledge on how to manage the capital market operations to be of benefit to investors,
stakeholders and industries;

It will encourage growing companies to emerge its opportunities in the capital market;

1.07 Scope and Limitation 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 focus only on the
capital market and its activities 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 2011 and 2020 due to the non-availability of some important
data.

1.08 Historical Development of the Nigerian Capital Market

The activities and trading in this market is managed by the Nigerian Stock Exchange (NSE)
which evolved in 1977 from the Lagos Stock Exchange, established in June 5, 1961. As at
end of2009, there were ten trading floors of the NSE. The Lagos branch serves as the head
office of the exchange, Enugu, Ibadan, Onitsha, Kaduna, Kano, Port Harcourt, Yola, Benin
and Abuja were the other branches of the exchange (Oladipo and Tunde, 2013).

Each branch has a trading floor, which creates opportunities for buying and selling of
securities. Other than these, there are institutions such as the Securities and Exchange
Commission (SEC), which is the regulatory authorities and was established in 1979, issuing
houses, Investment Advisers, Portfolio Managers, Investment and Securities Tribunal (IST),
the stock broking firms, registrars and other operators. The interactions among these players
influence the width and depth of the market. Prior to 1980s, trading in the market was weak,
attributable mainly to low level of information dissemination and awareness. However, with
the level of computerization and availability of corporate information, the market becomes
more efficient with major indicators reflecting remarkable growth. Since the1980s, most of
the market indicators including all share value index, number of deals, market capitalization,
total value of shares traded and turnover ratio have recorded significant increases. (Oladipo
and Tunde, 2013).

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The improvements could be attributed to the establishment of the Second tier Securities
Market(SSM) in 1985; the deregulation of interest rates in 1987, the privatization programme
of government owned companies, enhancement in market infrastructure and requirements,
innovations; as well as the banking sector reform. These developments have culminated in
unprecedented growth of both the primary and secondary markets (Ozurumba and Chigbu,
2013).Some of the major securities traded on the exchange during the period under review
included, government development stocks, industrial loans/preference shares and equities.

From 100.00 in 1984, the all share value index on the exchange rose to 57,990.22 in 2007,
but declined by 64.1 per cent to 20.827.17 in 2009 as some quoted banks were involved in
merger or acquisitions in the recapitalization exercise in the banking sector, while those that
were unsuccessful were de-listed from the exchange. . The growth and development of the
capital market in Nigeria can be traced to 1946 with the floating of N600,000 (more than
300,000pounds sterling) worth of government stocks. However, an organized market for the
secondary trading of issued stocks was lacking. In 1959, following the establishment of the
Central Bank of Nigeria (CBN) a year earlier, a N4million (2million pounds sterling). Federal
government of Nigeria development loan stock was issued in line with its role of fostering
economic and financial development. The stock market has helped government and corporate
entities to raise long term capital for financing new projects, and expanding and modernizing
industrial or commercial concerns (Nwankwo, 1991).

1.9 Operational Definition of Key Terms

Capital Market: The capital market is a market for mobilization and utilization of long term
funds for growth and development within individual firms and sectors of an economy.

Capital Trade Points (CTP): It is a mini stock exchange enacted by the Investment and
Securities Act (ISA) 1999 and revised in 2007.

Investment: This is setting aside of consumable income through channeling them into
productive areas and expecting returns in compensations for the risk-decisions made.

Market Capitalization: This is the value of a firm or industrial sector as determined by the
market of its issues and outstanding common stocks.

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Nigeria Stock Exchange: It is known as the Nigerian Stock Exchange market, where all
quoted companies in the different sectors in the Nigerian economy trade for long term
securities and also raise funds to finance their businesses and long term projects.

Number of Shares: This is referred to the total volume of shares owned by the
manufacturing companies for its ownership growth.

Portfolio: This is a collection of investment to which investors has allocated funds for the
purpose of earning a return.

Revenue: This is simply defined as the final profit of any companies after the deduction of
operating cost, interest rate and tax.

Stock Exchange: A stock exchange is an arrangement whereby large and small investors
alike buy and sell through stock brokers, securities (shares and bonds) of companies and
government agencies. This arrangement could be linked through internet communication,
telephone and fax communication, trading floor, media, etc. the stock exchange provides the
essential facilities for companies and government to raise money for business expansion and
development projects through investors who own shares incorporative bodies for the ultimate
benefit of the economy.

Stock Brokers: A stock broker is a firm or an individual who buys and sell securities on
behalf of investors for a commission called “Brokerage”. The commission charged is
regulated by the stock exchange.

Value of Shares: This is the price tag of companies’ share operating effectively in the capital
market for investors and stakeholders to comprehend with the desired share price of the
company is interested in investing his financial resources.

Bonds: This is a fixed interest or fixed income securities sold at the capital market to
investors for their investments securities interest on companies whom issues such corporate
bonds.

CHAPTER TWO

LITERATURE REVIEW

2.0 Preamble

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 The literature involves citing different contribution on what capital market is all about
and what means to follow in having a strong, viable and reliable market. Al-faki (2006),
states that the capital market is a” network of specialized financial institutions, series of
mechanisms, processes and infrastructure that, in various ways, facilitate the bringing
together of suppliers and users of medium to long terms capital for investment in
socioeconomic developmental projects’’.

Jhingan (2004) posited that 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.

2.1 Conceptual Framework

2.1.1 The Capital Market

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).

Nwankwo (1998), observed that the capital market comprises the complex of institution and
mechanism through which intermediate term funds and long term funds are pooled and made
available to business, government and individual. They also asserted that the capital market
comprises the process by which securities already outstanding are transferred. This definition
is very embracing; it contains the fact that the capital market has no fixed location and deals
on medium and long term funds, has government, individual and business firms as
participants and ensures liquidity as it provides market for both new and old securities. Alile
(1986), stressed that the central task of the capital market is the mobilization of funds in the
hands of individuals who save pool and channel such funds into productive uses.

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 A capital market is a segment of a nation’s financial system where the main article of
trade is medium and long-term financial instruments. Such instruments are generally referred
to as securities because of the level of confidence and assurance or guarantee it gives to the
investor on the repayment of their principal. It is true that the rate of economic growth of any
nation is inextricably linked to the sophistication of its financial market and specifically its
capital market efficiency. Financial markets assist the nations of the world to muster needed
financial resources and skills for growth and development of their various economies.

According to Adebiyi (2015) Equity markets in developing countries until the mid-1980s
generally suffered from the classical defects of bank dominated economics that are shortage
of equity capital, lack of liquidity, absence of foreign institutional investors, and lack of
investor's confidence in the stock market. The importance of capital market lies in its
financial intermediation capacity to link the deficit sector with the surplus sector of the
economy. The absence of such capacity robs the economy of investment and production of
goods and services for societal advancement. Akingboungbe (2006), states that funds could
thereby be idle at one end, while being sought at the other end in pursuit of socio-economic
growth and development.

The funding requirement of corporate bodies and government are often colossal, sometimes
running into billions of naira. It is therefore, usually difficult for those bodies to meet such
funding requirement solely from internal sources, hence they often look-up to the capital
market. It's because the capital market is the ideal source as it enables corporate entities and
government to pool monies from a large number of people and institutions. Thus, the socio-
economic function of the capital market is well established. Ekineh (1996) said; "It does not
only encourage and mobilize savings but also efficiently allocate such savings to areas of
need".

The Nigeria capital market is sub-divided into primary and secondary markets. New
securities are issued in the primary market and companies issuing these securities receive the
proceeds for the sale. The secondary market provides a forum for the sale of existing
securities by one investor to another investor. Thus, the efficient functioning of the market
paves way for the primary market by making investors more willing to purchase new
securities in anticiREVion of selling such in the secondary market. These securities are the
major instrument used to raise funds at the capital market.

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Capital market according to Akingboungbe (2006) is a market where medium to long-term
finance can be raised. In another exposition, Ekezie (2012) noted that capital market is the
market for dealings (that is, Lending and Borrowing) in longer-term, loan-able funds. The
development of the capital market according to Inanga and Emenuga, (2007) apparently
means that the stock market provides opportunities for greater funds mobilization, improved
efficiency in resource allocation and provision of relevant information for appraisal. Mbat
(2011) describes capital market 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. The restriction on the part of the borrowers is meant to
enforce the security of the fund provided by the lenders. In order to ensure that lenders are
not subjected to undue risk, borrowers in the capital market need to satisfy certain basic
requirement. Companies can finance their operations by raising funds through issuing equity
(ownership) or debenture bond. Securities are structured to mature in period of years from the
medium to the long-term of usually between five and twenty-five years. Capital market offers
access to a variety of financial instruments that enable economic agents to pool, price and
exchange risk. It encourages savings in financial form.

Nwankwo, (2011) said it is very essential for government and other institutions in
need of long-term funds and for suppliers of long-term funds. Based on the relevance of
market in accelerating economic growth and development, government of most nations tends
to have keen interest in the performance of its capital market. The concern is for sustained
confidence in the market and for a strong investor's protection arrangement. In Nigeria,
Securities and Exchange Commission (SEC) is the government agency responsible for
developing and regulating the Nigerian capital market. It was created by Act No. 71 of 1979
and re-named as Securities and Exchange Commission Decree No. 29 1988. The SEC
pursues its objectives by registering all market operators based on capital adequacy,
competence and solvency as criteria. Generally, the capital market among other things
provides a platform for the greater percentage of the populace top articiREVe in the
economy. In some countries, the capital market constitutes one of the largest sources of funds
for the public and private sectors to finance importance projects. Similarly, the market
provides a platform for mergers and acquisitions for companies desiring to do so while
venture capitalists also use it as an avenue for promoting venture capital development.

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 However, capital market also refers to a collection of financial institutions set up for
the granting of medium and long term loans. It is a market for long term instruments which
include market for government securities, market for corporate bonds, market for corporate
shares and market for mortgage loans. That is, it market for the mobilization and utilization
of long term funds for development (Anyanwu, 1993). According to Jhingan (2005) capital
market is a market that deals in long term loans. Capital market supplies industry with fixed
and working capital and finance medium-term and long-term borrowings of the central, state
and local governments. Rose and Marquis (2009) see capital market as a market designed to
finance long-term investments by businesses, governments and households. Mishkin (2007)
defined capital market as the market in which long-term debt (generally those with original
maturity of one year or greater) and equity instruments are traded. Nwaolisa, Kasie and
Egbunike (2013) defined capital market as a network of financial institutions and
infrastructure that interact to mobilize and allocate long-term funds in the economy. The
market affords business firms and governments the opportunity to sell stocks and bonds, to
raise long-term finds from the savings of other economic agents. 2.2.2 Reasons for the
establishment of capital market According to Anyanwu (1993), the following were the
reasons for the establishment of capital market:

To introduce a code of conduct, check abuses and regulate the activities of the operations of
the market;

To provide local opportunities for borrowing and lending for long term purposes;

To enable the authorities to mobilize long -term capital for economic development of the
country;

To provide facilities for the quotation and ready marketability of shares and stocks and
opportunities and facilities to raise fresh capital in the market;

To provide foreign businesses with the facility to offer their shares, and the Nigerian public
the opportunity to invest and participate in the shares and ownership of foreign businesses;

Through participation and ownership, to provide a healthy and mutually acceptable

environment for participation and co-operation of indigenous and expatriate capital in the
joint effort to develop the Nigerian economy to the mutual advantage of both parties;

Functions of capital market

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The functions of capital market includes:

The promotion of rapid capital formation;

The provision of sufficient liquidity for any investor or group of investors;

The creation of a built-in operational and allocational efficiency within the financial system
to ensure that resources are optimally utilized at relatively little costs;

The mobilization of savings from numerous economic units for economic growth and
development;

The encouragement of a more efficient allocation of new investment through the pricing
mechanism;

The provision of an alternative source of fund other than taxation for government;

The broadening of the ownership base of assets and the creation of a healthy private sector;

The encouragement of a mere efficient allocation of a given amount of tangible wealth

through changes in wealth ownership;

Provision of an efficient mechanism for the allocation of savings among competing

productive investment projects;

It is a machinery for mobilizing long term financial resources for industrial development;

It is an avenue for effecting payments on debt;

It is a necessary liquidity mechanism for investors through a formal market for debt and
equity securities (Anyanwu, 1993).

2.1.2 Problems of the Nigerian Capital Market

According to Edame and Ukoro (2013), the Nigerian capital market, like the national
economy, has been faced with many problems. These problems are both endogenous and
exogenous. The exogenous problems are those outside the direct control of the market but
which are regulation-induced. The endogenous problems are those that are internal to the
market but which are amenable to changes with improved operational procedures including
the adoption of information technology. Some of these problems are discussed below:

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Small Size of the Market

Among the major problems facing the Nigerian capital market is the size of the market. At
about 200 quoted companies and a market capitalization of 294.1 billion at the end-
December, 1999 the size of the market can be considered to be small when compared with
stock market in other emerging markets. For example, the South African stock market has
about 650 listed companies while South Korea has about 700 listed companies. The small
size of the Nigerian Stock market has been traced to apathy of Nigerian entrepreneurs to go
public due to the fear of losing control of their businesses. Another factor is the weak private
sector which is a serious constraint militating against healthy growth of the stock market.

Problem of Illiquidity of the Market

The liquidity of a stock market relates to the degree of access, which investors have in
buying, and selling of stocks in such a market. The more liquid a stock market is, the more
investors will be interested in trading in the market. The lack of adequate number of investors
in the Nigerian stock market is a reflection of problem of illiquidity in the market. At an
average ratio of 2 per cent per year, the turnover ratio, a measure 'of the value of shares
traded relative to local market capitalization is very low in Nigeria, compared with 10.0
percent, 9.0 percent and 4.6 percent in Botswana, Zimbabwe and Mauritius, respectively. The
low trading activities are also a result of the ownership structure. Until 1995, when the
Nigerian Investment Promotion Commission Decree 16 and the Foreign Exchange
(Monitoring and Miscellaneous) provisions Decree 17 were promulgated to replace the
Nigerian Enterprises Promotion Decree of 1984 and Exchange Control Act of 1962, the
Nigerian stock market was restricted largely to local investors apart from the original
investors in foreign companies who were already in the market before the indigenization
Decree of 1972. New foreign capital had little or no access to the market. The good
performance of Botswana, Zimbabwe and Mauritius has been traced to the open door
investment policy of these countries. In addition,” the buy and hold” attitude of Nigerian
investors contributed to the problem of illiquidity. The holdings of original investors and the
public sector are normally not traded’ except for terminal divestment. This often leaves only
the proportion of shares held by few individuals and institutional investors for trading on the
market, thus, limiting the liquidity of the market

Delay in Delivery of Share Certificates

16
Prior to April, 1997 when the Central Securities Clearing System (CSCS) started operation,
the delay in delivery of share certificates to investors and intra-firm settlements used was a
problem in the market. Many of the unclaimed certificates and dividend warrants that are
being published regularly are as a result of the delay in delivery of certificates. With the
introduction of CSCS, shareholders are now able to take advantage of capital appreciation
while transaction period-has been reduced to T+5. The objective of the CSCS system is to
achieve real-time transaction reporting, through automated order routing and executing
system, which allows post-trade comparison and analysis, and ensures audit trail of all the
market transactions.

Problem of Manual Call-over

The manual call-over whereby all stockbrokers have to be physically present on the floor of
the Exchange for trading in securities had also contributed to the slow growth of the market.
With the recent introduction of Automated Trading System (ATS), it is expected that
stockbrokers will be able to do business more efficiently and thus contribute to the growth of
the market.

Double Taxation

The Nigerian stock market is faced with the problem of double taxation. In a capital market,
the operating tax policies have implications for the supply and demand for financial assets.
Depending on its nature and structure, taxation could either enhance or retard capital market
growth. Tax can be a source of hindrance to development when it is high or levied at multiple
stages. Currently in Nigeria, there is income tax, capital gain tax, withholding tax and
company income tax. All these taxes together have the tendency of retarding investment
because of their burden on investors. Most often, countries that have experienced growth in
their stock market have come to realize the role which taxation plays in the promotion of
investment in the stock market. For instance, countries like Botswana, Ghana, Kenya,
Mauritius, Namibia and Swaziland have recognized the important role which taxation can
play in the development of the market. Taxation of equities at both the corporate tax and
dividend withholding levels is an important problem that needs to be examined. The practice
in the U. K. may offer a useful example for Nigeria. In the UK, through the Advance
Corporate Tax (ACT) System, individuals are given tax relief at the corporate level for
distributed earnings. The ACT was introduced in Britain to correct the distortions which
double taxation had on corporate investment. A number of developing countries like

17
Columbia, Jamaica, Indonesia and Mexico, have one form of tax integration or the other.
Presently, Nigeria has not taken any step to reduce the burden of double taxation as incentive
for investment in the capital market. Apart from its use as a means of generating revenue,
some countries have used tax policies as incentives for developing capital market. They have
been used not only for the supply and demand for securities, but also as penalties for
companies that were reluctant to go public. For example, Brazil used dividend tax exemption
or reductions, stock acquisition tax incentives and provision of tax fund shares as incentives
for developing the capital market.

Lack of Effective Underwriting

Lack of effective under-writing is one of the problems confronting the Nigerian capital
market. Underwriting could be in the form of firm contract, or stand-by arrangement and
when an issue is large, there would be need for an underwriting syndicate. An observed
deficiency of the Nigerian securities market is the non-existence of effective underwriting.
Though the issuing houses claim to undertake underwriting as part of their functions, and a
consortium of underwriters often exist when shares are being offered, underwriting business
has hardly taken place in the real sense of it. Underwriting entails effective placing of entire
issues, and establishing or maintaining a stable trading market for the under-written securities
for which there would always be a lead or managing underwriter. Only a few of the existing
issuing houses can undertake such functions that guarantee the underwriting of the shares not
absorbed by the investors up to a certain percentage. The .underwriters are in fact the ‘market
makers’ who purchase the securities concerned on their own account to maintain a price
when the market price of the offered security falls under the issue price. When such problem
arises, the lead or managing underwriter would be expected to buy all such securities and
distribute them to the other members of the underwriting syndicate or consortium according
to predetermined ratio.

Problem of Macroeconomic Instability

Lastly, the problem of macroeconomic instability in the country has continued to be a

hindrance in the development of the Nigerian capital market. Macroeconomic policies that
would ensure long-term stability are essential in attracting a sustainable long term
investments. Such policies should be conducive to both savings and investment to ensure
confidence in the economy. Policies must ensure attractive long-term yields for equities in
comparison with other domestic and foreign investment alternatives. Frequent fluctuations in

18
exchange rates and negative real rates of return on investments often force investors to move
to other investment outlets or out of the economy entirely.

Duality on the transfer process

This feature is based on the fact that the capital market performs the dual role of raising funds
through the issue of new instruments or selling existing ones to new investors. By this
function, the market helps to ratio funds among numerous competing alternative uses.

Environmental Imperatives for Capital Market Smooth Functioning

Before the objectives of capital market can be fully achieved for economic growth of any
nation, the following environmental factors are imperative for its smooth functioning;

An economic and administrative central structure cum policy measures that allow an
appropriate role for private sector enterprises: This refers to the encouragements and public
enlightenments made to the members of the public or benefits to be derived by investing their
savings in capital market and all other steps to boost development for the betterment of a
nation;

A policy scheme that encourages price flexibility as reflected by the interplay of supply and
demand factors. This is the work of the regulatory bodies like Nigerian Stock Exchange
(NSE), Security and Exchange commission (SEC) and government can come up with any
measures for its growth if the need arises;

A stable political environment: frequents changes of government and their policies cum
decisions without due consideration of the importance of capital market will not augur well
for development. Therefore a well-defined and articulated programme coupled with a stable
and organized political environment will have a positive effect on the activities and growth of
capital market;

Conditions for establishing a capital market

19
Ekiran (1999) the environment of a country plays a major role in the success or failure of
capital market development because if an environment is conducive, it will give room for the
rapid growth of a capital market than in an environment that is hostile.

Political Environment

This is the first to be considered in establishment of capital market. If there is enough

political stability, it gives the investors’ confidence that national policies will permit over
time and that this policies will appropriate measures to encourage private savings of both the
entrepreneurships and the investors. But in an unstable short term view, this causes a volatile
market and does not encourage long term planning.

Economic Environment

In an economy where market development becomes priority, government enterprise should

not be pre dominant, otherwise capital market development becomes difficult.

Role of Private Sector

The role of a stock market within an economy as an engine for capital formation is
intentioned with findings and positive constructive role for the private sector in general. To
achieve thus, both the private sector and the capital market must be integrated into the
country’s overall development programme, both must know and be responsive to the needs of
the population as a whole. In addition, microeconomics measures such as risk, yield and
liquidity of capital must be adopted to encourage the greater channeling of saving through
capital market.

Legal and Regulatory Environment

Regulation is necessary to protect the investors and in process increase their confidence. It is
also necessary to ensure a fair and orderly security in the market to achieve these objectives,
company laws must be modernized and the conditions granting the listing to companies
seeking quotations must be clear and positive, there must be rules and regulations for the
brokers, directors and also operators of the stock market. Also, there must be code of conduct
for brokers, directors and managers of the stock exchange, stock broking firms and quoted
companies.

2.1.3 Capital Market Instruments

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The instruments are the securities that are traded in the stock market. They cannot be
inspected or assessed the way electronics, tubers, apples, grapes etc are being assessed. The
instruments can be categorized into three major groups of securities according to Herbert
(2004). These are;

Ordinary shares

Preference shares

Debt instruments

Ordinary Shares: They are issued to owners of the company. They are long term financing
with a nominal value or face value. The memorandum and article of association of a company
specified the number of authorized ordinary shares a company can issue. The ordinary
shareholders of a company have a residual claim in the company, their claims to income and
assets come after the creditors and preference shareholders have been paid in full. As a result,
a shareholders return on investment is less than the return to a lender or preference
shareholders. However, there is no limit to the return of ordinary shares.

Preference Shares: This is another major source of long term financing to a company. The
holders of preference shares are entitled to a fixed percentage dividend before any dividend is
paid to ordinary shareholders. However, preference dividend can only be paid if sufficient
distributable profits are available, although with cumulative preference shares the right to an
unpaid dividend is carried forward to later years. The arrears of dividend on cumulative
preference shares must be paid before any dividend is paid to ordinary shares. For credibility
sake, companies always try to pay the fixed dividend regularly. Just like the debt instruments,
a preference shares has a nominal value and dividend, which is paid at a fixed percentage of
this amount. Preference shares can be redeemable or irredeemable.

Debt Instrument: A bond represents a method of long term borrowing by corporation of

government agencies, when a corporate bond is issued, it as a legal contract that goes with it
which contains the provision of loans in terms of its amounts, interest and maturity period.
Bonds are sold in multiples such as N1000. They are purchased by commercial banks,
insurance companies, pension fund and even individuals. This form of financing is usually
reserved for target companies or corporation. This is why they have prior claims on the firm’s
asset in the event of liquidating. There are different classes of bonds.

21
2.1.4 Types of Capital Market

2.1.4.1 Primary Market

Soyede (2005) Primary market is a market for new securities. It is a platform where the
company or government can raise money for investment or where already quoted companies
can raise fresh funds for expansion. Both the Securities and Exchange Commission (SEC)
and the Nigerian Stock Exchange (NSE) are involved in primary market activities. The
issuing houses and stock brokers also play prominent roles. Until 1993, when deregulation of
the capital market commenced, the SEC was responsible for pricing and allotment of new
issues in the Nigerian capital market while the quotation committee of the Nigerian Stock
Exchange approved only issue which is to be listed on the exchange’s official list. The
issuing houses and stockbrokers package issues for government and public companies.

However, the Central Bank of Nigeria acts as issuing houses for federal government stocks
when company wishes to sell such shares (offer for sale). If such company is already listed,
the price is technically suspended to forestall any insider or abuse of classified information.
This situation holds true reason for Companies going into mergers and acquisition or
rearrangement that may potentially have bearing on their price and the suspension is
sustained by the Nigerian Stock Exchange until such exercise is completed.

For companies seeking listing for first time, the securities are listed with the offer price; soon
after the offer exercise is completed instruments representing ownership are dispatched to the
shareholders. It is of paramount important to mention here that hitherto, Securities and
Exchange Commission was the sole body giving approval to offer price proposed by the
Issuer in conjunction with Issuing Houses. However, under the present dispensation the
issuing house proposes and defends a price at which it is willing to underwrite the entire
securities to be issued. This becomes the offer price and entirely conforms to the price. While
Securities and Exchange Commission examines the offer documents with a view to
ascertaining the adequacy of price and conformity with statutory requirements among other
things, the Nigerian Stock Exchange reviews the same documents to ensure the company or
institution meets its listing requirements.

Alile (1997) the primary market takes into representation the issuance which could be in form
of any of the following:

22
Offer For Sale: Public offers for shares in a company by existing shareholders, proceeds of
which go to the vendors. This is a system by which existing shareholders offer their
shareholding or part of them for public subscription. In other words, offer for sale is a transfer
of ownership of shares from existing holders to new holders. Most of the public offers under
the federal government privatization programmer under this category. It differs from offer for
subscription in that the proceeds of an offer do not go to the company but to the selling
shareholders;

Offer for Subscription: This is a direct issue to the public by floating a number of shares of
debenture stock. It carries the suppositions that the company is a public one and the proceeds
of the issue go to the company to finance expansion or and modernalisation. In other words,
the company issues a prospectus inviting the public to its shares and it should be noted that
the company cannot dictate who subscribes to its shares;

Stock Exchange Introduction: Where a company seeking quotation already has enough
shares held in public hands, the council of stock exchange may permit its security to be
introduced into and listed on the market, no new or existing shares to be sold. The added
marketability to raise fresh funds in the future invariably at a lower price or cost;

Private Placement: Securities are sold to the client of the Issuing Houses or Stockbrokers
handling the issue instead of being offered directly to the general public. This is often
necessitated by the desire to save time and cost of issue. The council of the Stock Exchange
seldom grants such permission and this method is utilized by quoted Plc’s. This differs from
offer from the subscription and offer for sale in that it is not an invitation to the public to
subscribe, rather, the shares or stocks are placed with a broker who then seeks out for the
prospective Purchasers;

Right Issue: These involve offer to buy more shares generally made to existing shareholders
and sometimes at concessionary price. Applications are considered by quotations committee
of the exchange for ratification and avoid excruciating interest rate charged in the money
market. The approval of the council gives the go ahead for the primary market activities
before the commencement of the primary market activities; the Securities and Exchange
Commission is given the application to determine the offer price of the security.

However, in view of favourable terms on which such issues are usually made, shareholders
scarcely ever miss the opportunity. Underwriting of securities is an aspect of primary market.

23
It is an intermediary process and it is far gaining ground in Nigerian Capital Market. They
buy from the issuers at one and sell to the investors at a slightly higher price. The price
differences referred to as “underwriters spread”, represents compensation for absorbing the
risk that goes along with guaranteeing the borrower, the expected proceed from sales before
the securities are actually placed in the market or in hand of investors.

2.1.4.2 Secondary Market

This enhances the new issue market in many ways, it provides the means by which
investor can monitor the value of their shares and liquidate them when they wish to do so.
Pandey (2006), it is a type of market where existing securities of a market are traded on daily
and continuous basis. It is the market for existing securities. This consists of exchanges and
over the counter markets where securities are bought and sold after their issuance in the
primary market. It has little to do with influencing the way an economy allocates its capital
resources or the way in which sailing surplus and savings deficit unit deal with one another.
However, events in the secondary market frequently provide the basis for the terms and
conditions that will prevail in the primary market. If there were no secondary market in which
investors could turn investments in new issues back into cash when they choose, many
investors would not buy new issues in first places. If any investors truly intend to make any
irrevocable commitment of their funds, the availability of a secondary market is an absolute
pre-requisite to the existence of a primary market in common stock. From the perspective of
the overall economy, the secondary augmentation of the flow of funds into the new issue
market is particularly important. It makes it possible for the economy to make long term
commitment in real capital.

This point is perhaps best illustrated by considering what would occur if the financial
claims issued by firms and individuals could not be traded in the secondary market. The
secondary market makes it possible for those who desire to make long term real investments
to obtain the money capital of savers who have no intension of committing themselves for the
long term. Thus, they provide the economy with the opportunity to consider entirely new
approaches to building its capital stock. Market capitalization is the market value of a
company’s issued shares capital; it is the product of the current quoted prices of shares and
the number of shares outstanding.

2.1.5 Role of Capital Market in an Economy

24
Al-faki (2006), the capital market is a” network of specialized financial institutions, series of
mechanisms, processes and infrastructure that, in various ways, facilitate the bringing
together of suppliers and users of medium to long terms capital for investment in socio-
economicdevelopmental projects’’. The capital market is divided into the primary and
secondary market.

The primary market or the new issues market provides the avenues through which
government and corporate bodies raise fresh funds through the issuance of securities which is
subscribed to by the general public or a selected group of investors. The secondary market
provides an avenue for sale and purchase of existing securities. Sule and Momoh (2009)
found that the secondary market activities have impacted more on Nigeria per caipta income
by tending to grow stock market earning through wealth than the primary market.

The role of the capital market in the development of the economy includes:

It provides opportunities for companies to borrow funds needed for long- term investment
purposes;

It provides avenue for the marketing of shares and others securities in order to raise fresh
funds for expansion of operation leading to increase in output or production;

It provides a means of allocating that Nations real and financial resource between various
industries and companies. 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;

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 essentials amenities for socio- economic development;

The capital market can aid the government in its privatization programme by offering her
shares in the public enterprises to members of the public through the stock exchange;

The capital market also encourages the inflow of foreign capital when foreign companies or
investors invest in domestic securities, provides needed seed money for creative capital
development and acts as a reliable medium for broadening the ownership base of family-
owned and dominated firms.

25
2.1.6 Opportunities in the Capital Market

Dozie (1996) the capital market can be described as a place where a nation’s wealth is bought
and sold. It creates facilities for raising funds for investment in long term assets. The
Nigerian capital market is no expectation to this global role. The opportunities that abound in
our market can be looked at from three major perspectives.

Corporate Finance Benefits of Capital Market

A unique benefit of stock market to corporate entities is the provision of long term, non-debt
financial capital. Through the issuance of equity securities, companies acquire perpetual
capital for development. Through the provision of equity capital the market enables
companies to avoid over reliance on debt financing. Thus, improving corporate debt to equity
ratio.

Financing Options in the Capital Market

The stock market offers an array of financing instruments that the long term investments that
meets the long term investment needs of both government and private sector. The medium
and long term corporate debt markets remain a critical element in the sustainable
development of economics.

Experience in Nigeria in the last decade, shows that the use of corporate bonds is a more
prudent method of raising long term finance than bank loans. The advantages are that states
or local government can implement their project quickly and at the same time avoid high
interest rates in the bank loans.

Secondary Market Activities

The stock market is an important economic sector whose uses are best appreciated from the
perspective of efficiency in capital formation and allocation. An efficient stock market
mobilizes savings and allocates a greater proportion to those investments with the highest
perspective rate of returns after giving due allowance for risk.

Secondary market is synonymous with the NSE and does not create new securities.

The business in this market is triggered off when investors in the primary market decide to
dispose their holdings. In effect, the issuing companies do not directly benefit from

26
transactions in the secondary market. It is the original investors that benefits. Such benefits
come in form of Okigbo (1981);

Dividend payment;

Stock splits;

Capital appreciation;

Long term hedge against trends.

Levels of Market Efficiency

A market is said to be efficient if it uses the information available correctly in setting and
adjusting prices of securities. Inoga (1977). Market efficiency refers to two essential
ingredient of price adjustment to new information. Speed and quality (direction and
magnitude) of the adjustment. The main effect of efficiency in capital market is that it
precludes most investors from the capacity or ability to out-perform the market. But the
market is deficient in term of speed and quality of it reaction, the sophisticated investors
would have little difficulty in profiting from the situation.

Alile (1997) and Pandey (2006) made a distinction between three levels of market efficiency
with each level relating to a specific set of information which is increasingly more
comprehensive than the previous level. These are weak, semi strong, and strong levels of
efficiency.

Weak efficiency

A market is efficient in the weak form if share prices fully reflect the information implied by
all prior price movements. Share price movements become totally independent of previous
price movement implying the absence of only price pattern with prophetic significance.
Prices would only respond to new information such as new economic event of new industry.

The implication of this is that historical price and returns information does not provide a basis
for superior forecasting of future price or returns. Therefore past information cannot help
investors beat the market and make excessive returns.

Semi strong efficiency

27
This is efficient on the semi strong sense if share price respond instantaneously and unbiased
to new published information. The implication of semi strong efficiency is that current share
prices would invariably represent the best interpretation of the information about the firm.
Therefore, it becomes futile for investors to search for bargain opportunities from analysis of
published data, such as annual reports or other corporate announcements designed to lure
them to the market.

Strong efficiency

The market is efficient in the strong form if share prices fully reflect not only published
information but also all relevant information including data not yet publicly available. To
conclude the review on the efficient capital market theory, it can be asserted that if prices and
returns prevailing at any point in the capital market do reflect all available historic and
current public information, it will be difficult for investors to achieve superior performance
by judging that security market conditions may be better or worse in the future.

2.1.7 The Second-Tier Securities Market and the Exchange

This market arose for various reasons. One of them was to encourage small firms in
participating in the activities of exchange. Another was to increase the number of quoted
companies. The Federal Government creates this market as a kind of solution to problems,
which these small companies faced in gaining quotation in the exchange. These companies
faced high cost of seeking quotation with exchange. There was the fear of losing control of
the business through going to the public. Also, it is known that Nigerians hate disclosing
accurate financial information about their business. Also little or no knowledge of the capital
market becomes a handicap to them. Many companies in Nigeria are experiencing these
problems. But the establishment of the second-tier securities market, it helped in solving most
of these problems.

Information requirement are not as extensive as that of the stock exchange. The firms
involved here are nurtured and helped to grow and graduate from second tier to the first tier
security market. Benefit of second tier security market;

Reduced cost of quotation especially for small firms;

Enhanced ability to buy and sell shares;

Assurance of continuity of business even after death of founders;

28
Greater scopes of raising capital for the companies;

Growth through help of the exchange and certain schemes provided by government like the
employees share scheme;

More knowledge in the capital market operation and benefits to be derived from it Inoga
(1977).

2.1.8 Overview of the Nigerian Capital Market

The capital market is cornerstone of every financial system since it provides the funds needed
for financing not only business and other economic institutions, but also the programme of
government as whole.

The capital market is essentially a market for long term securities that is stock, debenture and
bonds lasting for usually longer than three years. The proper functioning of the capital market
was not set up until the establishment of the Central Bank in 1959 and launching of the Lagos
stock exchange in 1961even though securities were floated as far back as 1946.

The needs to have an organized stock exchange came up and committee was set up by the
government under the chairmanship of Prof. R.W. Barbock to consider the feasibility of
having indigenous forum for the purchase and sales of shares and stocks. The Nigeria capital
market was established for the following reasons below:

To overcome difficulties of selling government stock;

To provide local opportunities and lending for long term purpose;

To enable authorities mobilized long term capital for economic growth and development;

To enable the foreign business the chance of offering their shares to interested Nigerians to
invest and participate in the ownership of these foreign business.

In view of the above the major participants in capital market are:

Government;

Quoted Companies (listed companies);

Stock Brokers;

29
Central Bank of Nigeria (C.B.N);

Banking and non-Banking Financial Institutions;

Nigerian Stock Exchange;

Nigerian Securities and Exchange Commission

Functions of the capital market:

The promotion of rapid capital;

It is machinery for mobilizing long-term financial resources for industrial development;

The provision of an alternative source of fund other than taxation for government;

The mobilization of savings from numerous economic units for growth and development;

The provision of liquidity for any investor or growth of investors;

The broadening of the ownership base of assets and the creation of a healthy private sector;

It is an avenue for effecting payment of debts;

The encouragement of a more efficient allocation of new investment through the pricing
mechanism;

The creation of a built in operational and allocation efficiency within the financial system to
ensure that resources are optimally utilized at relatively little cost;

It is a necessary liquidity mechanism for investors through a formal market for debt and
equity securities.

2.1.9 The Nigerian Security and Exchange Commission

The Nigerian security and exchange commission (NSEC) is the apex institution for
the regulation and monitoring of the Nigeria capital market. The commission was established
under the security and exchange commission decree 1979, operating retrospectively from 1st
April1978.

30
Prior to the SEC, two bodies had in succession been responsible for the monitoring of capital
market activities in Nigeria. The first was capital issues committee, which operated
between1962 and 1972. It could not be seen as the superintendent of the capital market
because its functions were more or less advisory without the force of instruction even through
its functions included the coordination of capital market activities. The next body was the
capital market issues commission (CIC) which came into being in March 1973. The C.I.C,
unlike its predecessor, had full powers to determine the price, timing and volume of security
to be issued.

Despite this wider power, the CIC could not be seen as the apex of capital market because it
concerned itself with public companies alone and its activities did not cover the stock
exchange and government securities. The enabling Act of the Securities and Exchange
Commission specifies its overriding objectives as investors’ protection and development
while its functions were divided into two regulatory and development.

The functions of the commission are extensively spelt out in Nigeria Securities and Exchange
Commission Decree (Decree No 29) of 1983 and the Nigerian Enterprises Promotion
Decree1990. According to section (6) subsection (9) to (10) the commission is charged with
the following duties and functions:

Determining the amount of price and time when securities of companies are to be sold to the
public whether through offer for sale or subscription;

Registering all securities proposed to be offered for sale to or for subscription by the public;

Maintaining surveillance over the securities market to ensure orderly, fair and equitable
dealing in securities;

Protecting the integrity of the security market against any abuses arising from the practice of
insider trading;

Acting as regulatory apex organization for the Nigerian capital market including the Nigerian
Stock Exchange and its branches to which it would be at liberty to delegate power;

Creating the necessary atmosphere for the orderly growth and development of the capital
market;

31
Reviewing, approving and regulating merger acquisition and all forms of business
combination;

Registering Stock Exchange or their branches, registers investment advisers, securities

dealers and their agents and controlling and supervising their activities with a view to
maintaining proper standards of conduct and professionalism in the securities business;

Undertaking such other activities as are necessary or expedient for giving fall effect to the
provision of this decree.

2.1.10 The Nigerian Stock Exchange

As one of the constituencies of the capital market, the exchange is a private, nonprofit
making organization, limited by guarantee. It was incorporated via the inspiration and support
of businessmen and the federal government. But owned by about 300 members. The
membership includes financial institution, stockbrokers and individual Nigerians of high
integrity, who have contributed to the development of the stock market and Nigerian
economy.

The Nigerian stock exchange started with the incorporation of the then Lagos stock exchange
in 1960. Trading commenced on the exchange in 1961 after the enactment of the Lagos stock
exchange Act of 1961, the self-regulatory 18 organization was subsequently reorganized and
renamed the Nigerian stock exchange 197, based on the report and recommendation of Pius
Okigbo financial system review commission.

The stock exchange is thus an institution of capital market, which provides trading floors
where all dealing members operates on every business day. The exchange now has nine (9)
branches and all the branches function principally as trading floor.

Functions of Nigerian Stock Exchange

To provide opportunities for raising new capital;

To promote increasing participation by the public in the private sector of the economy;

To provide appropriate machinery to facilitate further offerings of stocks and shares to the
public;

32
To provide a central meeting place for members to buy and sell existing stocks and shares
and for granting quotation to new ones;

To reduce the risk of liquidity by facilitating the purchasing and sale of securities.( Al-faki,
2007);

2.1.11 Recent Development in the Capital Market

The Nigerian Capital Market in recent times has witnessed a lot of development such
as the introduction of automated trading system (ATS) in 1999. Transactions in securities on
the floor of the stock exchange are now executed electronically by brokers trading on work
stations (computers), which are linked to a central server at the data centre or control room of
the Exchange. The ATS allows traders to view entire market on their computers at a glance as
they make their offers and bids.

This has increased transparency in the market. Before the introduction of the ATS,
transactions on the floor of the exchange were done manually through the open call over
system. Introduction of the Central Securities Clearing System (CSCS), a subsidiary of the
NSE in 1997.

The CSCS facilitates an efficient, faster and more secured process of purchase and sale of
securities in the market. Traders are now cleared and settled on the transaction day plus (3)
three days (T+3) basis, as against T+14 which existed before the introduction of the CSCS
(CBN 2009).Introduction of floorless (remote) trading system is an improvement to the
Automated Trading system ATS which requires no physical trading floor. The securities
dealers simply trade through computer systems mounted in their offices but linked to a
Central System on the Stock Exchange.

2.1.12 Introduction of Trade Alert by NSE/CSCS

It works through a software device programmed into the main computer system of the
CSCS which alerts subscribers whenever there are transactions on their accounts. A message
is sent to a subscriber’s mobile phone to notify him or her of such transaction. The subscriber
either Okays or aborts the transaction.

The establishment of the Abuja Securities and Commodities Exchange (ASCE) (SEC, 2005)
is a significant development. It is an organized market that provides facilities for trading in

33
commodities and securities. Commodities are products or raw materials such as petroleum,
cocoa, rubber, palm oil, palm kernel, cotton, groundnut, soybeans, and solid minerals.

Transactions in commodities are to be made through contracts, which have finite lives and
delivery dates. The ASCE was established to deepen the Nigerian capital market. The
introduction of Capital Trade Points (CTPs) is another major development. These are mini
exchanges in tended to provide market places for the buying and selling of securities of small
enterprises that cannot meet the more stringent listing requirements of the stock exchanges.
The amounts of funds that can be raised at CTPs are also limited. The major objective of
CTPs is to attract local and small companies to the market and to provide them the
opportunity to raise funds from the market at relatively low cost, to simplify the process of
raising funds and to bring capital market activities closer to the grassroots.

The Nigerian Capital Market Institute (NCMI) was established to bridge the
knowledge gap in the capital market by providing specialized courses to stakeholders.
Without a crop of highly professional operators and regulators, the capital market objectives
of contributing to the development of the Nigerian economy will be an impossible task. With
the establishment of the NCMI, the knowledge base of stakeholders in the capital market has
definitely been enhanced to enable them confront present and future challenges.

The code of corporate governance for public companies which was introduced in
2003essentially provides for the conduct of the affairs of companies. It deals with issues
concerning Board of Directors, shareholders, Audit committees etc, the code is expected to
enhance corporate discipline, transparency and accountability. The code is currently of
persuasive nature. However, appropriate sanctions are meted when necessary. In the spirit of
the NEEDS programme of the Federal Government, all public companies have been directed
to report their level of compliance with the code in their annual reports and accounts, and
prospectuses(whenever issued). The Security and Exchange Commission (SEC) has
dedicated a department (Office of the Chief Accountant), that will among other things
monitor public companies compliance with the code.

The SEC set up industry committees on pension funds, bond market and unclaimed dividends
years back. The work of the committees contributed to the pension reform programme and to
the executive bill on the unclaimed trust fund which if passed into law is expected to make
dividends available to investors whenever they show up instead of the present situation where
dividends are statute barred after twelve years.

34
2.1.13 Prospects of the Nigerian Capital Market

The Nigerian stock market has the capacity to provide channels for government and
corporate entities to raise new funds and for deepening or broadening existing capital base.
Such sound financial services will no doubt serve as hedge against the vagaries of business
and economic cycles which have in recent time shaken the basic fabrics of the national
economy.

The capital market as the citadel of the private sector is a network of institutions that can
render financial services capable of revamping a nation’s economy. But for it to render such
services with optimal efficiency, the assistance of government is needed in the area of fiscal
policies and in the provision of efficient infrastructure, telecommunications and investment
incentives.

No capital market institution works in isolation, if the entire system is to function properly
(Okeke, .2004).Capital market instruments and institutions help to support national growth
and development. Capital markets should therefore be accorded pride of place in national
economic development programmes.

2.1.14 Challenges of the Nigerian Capital Market

The level of capital market awareness in the country is low as many Nigerians are still
very much uniformed about this arm of the financial market. SEC has been marking a lot of
efforts in this regard through its series of investor education programs such as state
enlightenment programs, specialized seminars, workshops and conferences. Nevertheless all
hands must be on deck in ensuring that the awareness level is greatly improved. It will
require the use of Government machinery and Non- Governmental Organisations (NGOs) to
carry out the awareness campaign to the desired level required. State Chambers of
Commerce, in collaboration with their respective Ministry of Commerce and Industry should
collaborate to design programmes that will be specifically tailored to encourage their respect
communities to be active participants in the capital market.

The reform of the Nigerian economy will be predicated on a number of factors, among which
are the formulation of capital market friendly policies that include tax and other incentives to
investors and other operators in the market. These will help promote a strong private sectored
economy as envisaged by NEEDS contribute to high employment level, low inflation rate and
stable exchange rate.

35
 Capital flight endangers the growth of the capital market and is an indication of a vote
of no confidence in an economy. Capital knows no boundary”, and will flow only to an
economy which offers certain attractions including safety of investment, and attractive return
on investment. Foreign investors and Nigerians in the Diaspora should be encouraged to
invest in the Nigerian Capital Market. Information on the Nigerian Capital Market should be
made available on a regular basis to the above groups to stimulate their interest and propel
them to invest. Deepening of the market and the introduction of new products such as
derivatives and better legal framework are bound to encourage foreign investors.

Among the biggest challenges of the Nigerian Capital Market is the creation of a highly
liquid market in which investors can buy and sell with relative ease (the free entry free exit
maxim) and large transactions are consumed without significant changes in prices. This
becomes necessary given the backdrop that well informed investors generally consider the
level of market liquidity before investing in such market.

They will only consider a market which provides ease of entry and exit. To a large extent, the
changes that have taken place in the stock market in recent years have improved the standing
of the capital market.

Analysis of the Nigerian Capital Market Performance

The Nigerian capital market has performed fairly despite the numerous challenges and
problems some of which include: the buy and hold attitude of Nigerians, massive ignorance
of a large population of the Nigerian public of the nature and benefits of the capital market,
few investment outlets in the market, lack of capital market friendly economic policies and
political instability, private sector led economy and less than full operation of recent
developments like than full operation of recent developments like the Automated Trading
System (ATS), Central Securities Clearing System (CSC), On-line and Remote Trading,
Trade Alerts and Capital Trade Points of the Nigerian Stock Exchange.

Market Capitalization

This is the most widely used indicator in assessing the size of a capital market to an economy.
In a bearish market the market capitalization falls and vice versa for a bullish market.
Before1988, the Total market capitalization was less than N10 billion from 1988 to 1994. It
hovered between N10 billion to N57 billion. In 2003 it was N1, 3593 trillion, N2.1125 trillion
in 2004 and N5.12 trillion in 2006. The market capitalization recorded the highest value of

36
N13.2294trillion in 2007. But this fell to N9.562 trillion in 2008 due to the global financial
meltdown.

The percentage market capitalization compared to the economy’s Gross Domestic Product
(GDP) helps to assess the size of the stock market. In 1981, it rose again to 9.3% in 1995,
10.6% in 1996; 18.9% in 2003, 25.6% in 2004 and 27.4% in 2005. Total market
capitalization in 2013 closed at N18.60 trillion, as against N14.80 trillion in 2012, indicating
an appreciation of 25.68%.

Total New Issues

The Total New Issues before 1989 was below N1 billion, however, from 1989 to 1996 it
hovered between N1 billion to N10 billion. The amount crossed the N10 billion marks in
1997.For instance, between 1996 and 2001, a total of 172 new issues (securities of public
companies amounting to N56.40 billion) were floated in the capital market. Total new Issues
were valued at N5.85 billion in 1996 but it rose by about 532% to 37.198 billion in 2001.
Total new Issues were N61, 284 billion, in 2002, N180, 079.9 billion in 2003. N195, 418.4
billion in 2004 andN552, 782 billion in 2005. It crossed the trillion mark in 2007 being
N1.935 trillion that year but fell to N1.509 trillion in 2008.

Listed Securities

The number of equities listed increased from 3 in 1961 to 13 in 1971, 93 in 1981 in 2001
and198 in 2005. For the SSM, it was 1 in 1985 and 20 in 1995.After falling from 23 in 1993,
it fell to 19 in 1997 and from then to 2005 it remains at 16. The total securities increased from
8 in 1961 to 60 in 1971; 194 in 1981, 23 in 1991, 261 in 2001,288 in 2005 and 301 in 2008.

Value of Transaction

From 1961 to 1975, the annual value of the NSE was below N100 million, however, from
1976to 1994 it was between N100 million and N600 million. In 1995, the Trading value
crossed N1billion. It was N120.70 billion in 2003, N225, 820.5 billion in 2004 and N4,4
trillion in 2008.

From 1961 to 1994, Government Stock dominated the market between 58.91% and
99.5%whereas from 1995 the industrial securities continue to dominated the market.

37
2.1.15 Economic Growth

Economic growth refers to the ability of the economy to increase the production of
goods and services with the stock of capital and other factors of production within the
economy (Nnanna, Englama, & Odoko, 2004). Thus, it entails increases in per capita income
that will lead to the attainment of a high standard of living equivalent to that of industrialized
countries (Michael & Stephen, 2011). Whereas economic development is a policy
intervention endeavor with the aims of economic and social well-being of the people,
economic growth is a phenomenon of market productivity and a rise in GDP. Hence, the
Organization for Economic Co-operation and Development (OECD)(2014) defined GDP as
an aggregate measure of production equal to the sum of the gross values added of all
residents, institutional units engaged in production (plus any taxes, and minus any subsidies,
on products not included in the value of their outputs). In other words, the GDP being the
market value of goods and services produced in the economy over a period of one year
should therefore have a link to the capital market activities. Hence, Sen, (1983) points out
that economic growth is one aspect of the process of economic development of any nation of
the world.

The extent to which changes or variations in market capitalization, total value of transactions
and all shares index have instigated systematic variations in economic growth in Nigeria
constitutes an issue for empirical verification in the paper.

2.1.16 Capital Market Operations

The capital market is an organized financial market where medium to long-term

financial instruments or securities such as bonds, shares and debentures, mortgages, insurance
products, etc., are traded (Onwe, 2015). Capital market operation is the essential part of
financial system that is concerned with raising capital by dealing in shares, bonds and other
long-term financial instruments or investments. It’s a market in which long term debt (over a
year) or equity backed securities are bought and sold, it help to channel the wealth of savers
to those who can put it to long term productive use, such as company or government making
long term investments. Capital market consist the Primary Market where New Securities are
issued and sold, while the Secondary Market is where already issued Securities are traded
between investors (Solomon, 2013).

38
2.1.17 Market Capitalization (MCAP)

Market capitalization is one of the major indicators of the capital market in any given
economy. According to Osaze (2007) market capitalization is the total value of all equities
listed on a stock exchange. Similarly, it is the function of the prevailing market price of
quoted equities and the size of the issued and paid up capital. Market capitalization is very
crucial in the measurement and assessment of the financial market and it influence on
Economic growth. Al-Faki (2006) posits that total market capitalization rose from N10
Billion in 1988 to N2.9 Trillion in 2005, indicating such tremendous increase in market
capitalization has enormous effect on the Nigerian economy, denoted as real gross domestic
product (RGDP).

Adjasi and Biekpe (2006) study the effect of stock market development on economic growth
in 14 countries in a dynamic panel data modeling setting, the results established that market
capitalization has positive influence on stock market development and economic growth.
Beck and Levine (2004) revealed that with market capitalization, indicating that mere listing
of shares will influence resource allocation and economic growth. In the same vein, Levine
and Zervos (1998) argue that market capitalization is not a good predictor of economic
growth. Meanwhile, Yartey (2008) and Ovat (2012) differ on this issue, and noted that the
assumption behind this measure is that market capitalization is positively correlated with the
ability to mobilize capital and diversity risk on an economy wide basis. Levine (1997) has
observed that different measures of financial market development are highly correlated with
economic growth. Ojo (2010) found that market capitalization contributes positively to the
growth of any economy. One of the tasks of this study is to verify empirically the influence of
market capitalization on the growth of the Nigerian economy from 2000 to 2018.

2.1.18 Total Value of Transactions (TVT)

The total value of transaction is the total value of shares traded on the stock market
exchange. It is also the total value traded ratio measures the organized trading of firm equity
as a share of national output. The total value traded ratio complements the market
capitalization ratio: although a market may be large, there may be little trading. A discussion
on value of transaction in relation and economic growth could be based on economic variable
such as Gross Domestic Product and capital market activities. According to Okpara (2010),
significant changes in the market value of shares traded were expected to have a positive
impact on the GDP. This invariably means that significant changes in the market indicators

39
will affects its growth. In analyzing the value of transactions on the Nigeria stock exchange,
Al-faki (2006) observed that from 1961-1990, government stock dominated trading value the
capital market with a percentage range from 58.91% to 99.5%; and thereafter, industrial
securities began to dominate. Al-Faki notes that overall value of transaction from 1961 to
2005 crossed N262.9 Billion which is seen to have significant impact on the gross domestic
product (GDP). The extent to which the total value of transactions on the Nigerian Stock
Exchange has influenced economic growth in Nigeria remains to be resolved empirically in
this study.

2.1.19 All Shares index (ASI)

The ASI is defined as a series of numbers which shows the changing average value of
the share prices of all companies on a stock exchange, and which is used as a measure of how
well a market is performing. It is a tool used by investors and financial managers, and
scholars to describe the market and to compare the return on specific investments. Popoola,
Ejemeyonwu, Alege, Adu, and Onabete (2017) assert that ASI is a statistical data computed
annually to measure the changes in the value of commodities and securities. According to
these authors, the ASI is derived from the price of all or some market constituents, usually
expressed in percentages from base periods. The study has as one of its tasks the empirical
examination of the contribution of all shares index to the growth of the Nigerian economy
from the period 2000 to 2018.

2.1.20 Stock Market capitalization

Market capitalization refers to the market value of trading shares or quantities in the
traded item. It also means the value of all the securities secured in relation to their market
prices (Nzotta, 2004).Market capitalization refers to the overall value of a company's shares.
It can be determined by multiplying the price of a stock by its total number of outstanding
shares. For instance, if it sells $50 per share, the market cap for a 20 million share company is
$1 billion. It makes it possible for investors to understand the relative dimensions of one
company versus another. Market cap measures what an open market company is worth and
the market perception of its future prospects because it reflects what investors are prepared to
pay for their stocks. It can be used as a social media platform to consider company value and
is a choice in other ways of looking at sales. Pavone (2019) citing Dias (2013) stated that
market capitalization is an important market indicator of the value of shares and the value of
companies in general.

40
Economic Growth Conceptualized

Economic growth means an increase in the capacity of an economy to produce goods

and services, compared from one period of time to another. Economic growth is a process by
which a nation wealth increases over time (Duke & Nkamare 2015). Economic growth can
also be referred to as the increase of per capita gross domestic product (GDP)or other
measures of aggregate income, typically reported as the annual rate of change in the real GDP
(Agu 2018);this definition is thus adopted for use. Uwakaeme (2015) stated that economic
growth is a central policy goal of any government. Experts and economic planners have had
to choose between or combine some of the macro economic variables when addressing
relevant issues in economic management. Economic growth measured by Gross Domestic
Product (GDP) confer many benefits, including raising the general standard of living of the
population as measured by national income per capita, facilitating the distribution of income,
enhancing the timeframe for achieving the basic needs of man to a significant majority of the
population.

Problems of the Nigerian Capital Market

According to Edame and Ukoro (2013), the Nigerian capital market, like the national
economy, has been faced with many problems. These problems are both endogenous and
exogenous. The exogenous problems are those outside the direct control of the market but
which are regulation-induced. The endogenous problems are those that are internal to the
market but which are amenable to changes with improved operational procedures including
the adoption of information technology. Some of these problems are discussed below:

Small Size of the Market

Among the major problems facing the Nigerian capital market is the size of the market. At
about 200 quoted companies and a market capitalization of 294.1 billion at the end-
December, 1999 the size of the market can be considered to be small when compared with
stock market in other emerging markets. For example, the South African stock market has
about 650 listed companies while South Korea has about 700 listed companies. The small
size of the Nigerian Stock market has been traced to apathy of Nigerian entrepreneurs to go
public due to the fear of losing control of their businesses. Another factor is the weak private
sector which is a serious constraint militating against healthy growth of the stock market.

41
Problem of Illiquidity of the Market

The liquidity of a stock market relates to the degree of access, which investors have in
buying, and selling of stocks in such a market. The more liquid a stock market is, the more
investors will be interested in trading in the market. The lack of adequate number of investors
in the Nigerian stock market is a reflection of problem of illiquidity in the market. At an
average ratio of 2 per cent per year, the turnover ratio, a measure 'of the value of shares
traded relative to local market capitalization is very low in Nigeria, compared with 10.0
percent, 9.0 percent and 4.6 percent in Botswana, Zimbabwe and Mauritius, respectively. The
low trading activities are also a result of the ownership structure. Until 1995, when the
Nigerian Investment Promotion Commission Decree 16 and the Foreign Exchange
(Monitoring and Miscellaneous) provisions Decree 17 were promulgated to replace the
Nigerian Enterprises Promotion Decree of 1984 and Exchange Control Act of 1962, the
Nigerian stock market was restricted largely to local investors apart from the original
investors in foreign companies who were already in the market before the indigenization
Decree of 1972. New foreign capital had little or no access to the market. The good
performance of Botswana, Zimbabwe and Mauritius has been traced to the open door
investment policy of these countries. In addition,” the buy and hold” attitude of Nigerian
investors contributed to the problem of illiquidity. The holdings of original investors and the
public sector are normally not traded’ except for terminal divestment. This often leaves only
the proportion of shares held by few individuals and institutional investors for trading on the
market, thus, limiting the liquidity of the market

Delay in Delivery of Share Certificates

Prior to April, 1997 when the Central Securities Clearing System (CSCS) started operation,
the delay in delivery of share certificates to investors and intra-firm settlements used was a
problem in the market. Many of the unclaimed certificates and dividend warrants that are
being published regularly are as a result of the delay in delivery of certificates. With the
introduction of CSCS, shareholders are now able to take advantage of capital appreciation
while transaction period-has been reduced to T+5. The objective of the CSCS system is to
achieve real-time transaction reporting, through automated order routing and executing
system, which allows post-trade comparison and analysis, and ensures audit trail of all the
market transactions.

42
Problem of Manual Call-over

The manual call-over whereby all stockbrokers have to be physically present on the floor of
the Exchange for trading in securities had also contributed to the slow growth of the market.
With the recent introduction of Automated Trading System (ATS), it is expected that
stockbrokers will be able to do business more efficiently and thus contribute to the growth of
the market.

Double Taxation

The Nigerian stock market is faced with the problem of double taxation. In a capital
market, the operating tax policies have implications for the supply and demand for financial
assets. Depending on its nature and structure, taxation could either enhance or retard capital
market growth. Tax can be a source of hindrance to development when it is high or levied at
multiple stages. Currently in Nigeria, there is income tax, capital gain tax, withholding tax
and company income tax. All these taxes together have the tendency of retarding investment
because of their burden on investors. Most often, countries that have experienced growth in
their stock market have come to realize the role which taxation plays in the promotion of
investment in the stock market. For instance, countries like Botswana, Ghana, Kenya,
Mauritius, Namibia and Swaziland have recognized the important role which taxation can
play in the development of the market. Taxation of equities at both the corporate tax and
dividend withholding levels is an important problem that needs to be examined. The practice
in the U. K. may offer a useful example for Nigeria. In the UK, through the Advance
Corporate Tax (ACT) System, individuals are given tax relief at the corporate level for
distributed earnings. The ACT was introduced in Britain to correct the distortions which
double taxation had on corporate investment. A number of developing countries like
Columbia, Jamaica, Indonesia and Mexico, have one form of tax integration or the other.
Presently, Nigeria has not taken any step to reduce the burden of double taxation as incentive
for investment in the capital market. Apart from its use as a means of generating revenue,
some countries have used tax policies as incentives for developing capital market. They have
been used not only for the supply and demand for securities, but also as penalties for
companies that were reluctant to go public. For example, Brazil used dividend tax exemption
or reductions, stock acquisition tax incentives and provision of tax fund shares as incentives
for developing the capital market.

43
Lack of Effective Underwriting

Lack of effective under-writing is one of the problems confronting the Nigerian capital
market. Underwriting could be in the form of firm contract, or stand-by arrangement and
when an issue is large, there would be need for an underwriting syndicate. An observed
deficiency of the Nigerian securities market is the non-existence of effective underwriting.
Though the issuing houses claim to undertake underwriting as part of their functions, and a
consortium of underwriters often exist when shares are being offered, underwriting business
has hardly taken place in the real sense of it. Underwriting entails effective placing of entire
issues, and establishing or maintaining a stable trading market for the under-written securities
for which there would always be a lead or managing underwriter. Only a few of the existing
issuing houses can undertake such functions that guarantee the underwriting of the shares not
absorbed by the investors up to a certain percentage. The .underwriters are in fact the ‘market
makers’ who purchase the securities concerned on their own account to maintain a price
when the market price of the offered security falls under the issue price. When such problem
arises, the lead or managing underwriter would be expected to buy all such securities and
distribute them to the other members of the underwriting syndicate or consortium according
to predetermined ratio.

Problem of Macroeconomic Instability

Lastly, the problem of macroeconomic instability in the country has continued to be a

hindrance in the development of the Nigerian capital market. Macroeconomic policies that
would ensure long-term stability are essential in attracting a sustainable long term
investments. Such policies should be conducive to both savings and investment to ensure
confidence in the economy. Policies must ensure attractive long-term yields for equities in
comparison with other domestic and foreign investment alternatives. Frequent fluctuations in
exchange rates and negative real rates of return on investments often force investors to move
to other investment outlets or out of the economy entirely.

Capital Market and Economic Growth

The capital market is expected to accelerate economic growth, by providing a boost to

domestic savings and increasing the quantity and the quality of investment. This is expected
to be so in principle (Atoyebi, 2013). The market is expected to encourage savings by
providing individuals with an additional financial instrument that may better meet their risk

44
preferences and liquidity needs. Savings rate can be increased through better savings. 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. According to Capital market can
positively influence economic growth through encouraging savings among individuals and
providing avenues for firm financing.

Financial instruments that enable economic agents to pool price and exchange are
been triggered by the access offered by Capital market. Through assets with attractive yields
liquidity and risk characteristics, it encourages savings in financial form. This is very
essential for government and other institutions in need of long term funds and for suppliers of
same. Companies can finance their operation by raising funds through issuing equity
(ownership) or debenture/bond borrowed as securities. Equity have perpetual life while
debenture or bond issues are structured to mature in periods of years varying from the
medium to long-term of usually between five and twenty five years.( Mbat, 2001). 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 a development 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, 2009).

The theoretical explanation on the nexus between capital market and economic
growth is further elucidated using Efficient Market Hypothesis (EMH) developed by Fama in
1970. According to EMH, financial markets are efficient or 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

45
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
Investors Access to Affordable Credit Increase in GDP Credit Development.

The capital market provides a means through which this is made possible by investing in
securities thereby fostering economic growth.

The Nigerian Security and Exchange Commission

The Nigerian security and exchange commission (NSEC) is the apex institution for
the regulation and monitoring of the Nigeria capital market. The commission was established
under the security and exchange commission decree 1979, operating retrospectively from1st
April 1978. Prior to the SEC, two bodies had in succession been responsible for the
monitoring of capital market activities in Nigeria. The first was capital issues committee,
which operated between 1962 and 1972. It could not be seen as the superintendent of the
capital market because its functions were more or less advisory without the force of
instruction even through its functions included the coordination of capital market activities.
The next body was the capital market issues commission (CIC) which came into being in
March 1973. The C.I.C, unlike its predecessor, had full powers to determine the price, timing
and volume of security to be issued. Despite this wider power, the CIC could not be seen as
the apex of capital market because it concerned itself with public companies alone and its
activities did not cover the stock exchange and government securities.

The enabling Act of the Securities and Exchange Commission specifies its overriding
objectives as investors’ protection and development while its functions were divided into two
regulatory and development. The functions of the commission are extensively spelt out in
Nigeria Securities and Exchange Commission Decree (Decree No 29) of 1983 and the
Nigerian Enterprises Promotion Decree 1990. According to section (6) subsection (9) to (10)
the commission is charged with the following duties and functions among others:

Determining the amount of price and time when securities of companies are to be sold to the
public whether through offer for sale or subscription;

Registering all securities proposed to be offered for sale to or for subscription by the public.

46
The Nigerian Stock Exchange

As one of the constituencies of the capital market, the exchange is a private, nonprofit
making organization, limited by guarantee. It was incorporated via the inspiration and support
of businessmen and the federal government. But owned by about 300 members.

The membership includes financial institution, stockbrokers and individual Nigerians of high
integrity, who have contributed to the development of the stock market and Nigerian
economy.

The Nigerian stock exchange started with the incorporation of the then Lagos stock exchange
in 1960. Trading commenced on the exchange in 1961 after the enactment of the Lagos stock
exchange Act of 1961, the self-regulatory organization was subsequently reorganized and
renamed the Nigerian stock exchange 197, based on the report and recommendation of Pius
Okigbo financial system review commission.

The stock exchange is thus an institution of capital market, which provides trading floors
where all dealing members operates on every business day. The exchange now has nine (9)
branches and all the branches function principally as trading floor.

Functions of Nigerian Stock Exchange

To provide opportunities for raising new capital;

To promote increasing participation by the public in the private sector of the economy;

To provide appropriate machinery to facilitate further offerings of stocks and shares to the
public;

To provide a central meeting place for members to buy and sell existing stocks and shares
and for granting quotation to new ones;

To reduce the risk of liquidity by facilitating the purchasing and sale of securities. (Al-faki,
2007).

Trends in Global Capital Market

Rapid changes, innovations and co operations have been witnessed in the global
capital market recently. Osaze (2007) listed these emerging trends as new market realities,
technology and innovations, integration of markets, transparency, reliability and

47
comparability of information. One current reality is the increased popularity of hedge funds
as a means of reducing or transferring risks. Also, computer driven electronic trading has
replaced open outcry system.

Stricter regulations and effective enforcement tend to stabilize the market. Technological
innovations have resulted in electronic trading platforms. Improved trading software are
being developed. Also new and sophisticated financial software are now available. These
have revolutionized trading in stock exchanges.

Integrations of financial markets are currently going on. Trading in securities is now done
across national boundaries. Stock trading has been regionalized and stock exchanges
hybridized. This has resulted in mega exchanges, e.g., EURONEXT, coming out the Paris,
Amsterdam, Lisbon, Geneva, and Brussels stock markets. The issue of transparency,
reliability and comparability of information arises from globalization of the stock markets.
This highlights greater transparency in reporting. International standards and practices are
now in vogue. This will further reduce fraud and increase reliance on capital market for
raising long term funds.

Finally, corporate governance issues are now in the front banner. This is because of the need
to handle conflict of interest at board level and allow auditors independence in their duties;
Good corporate governance will protect the investor’s value and market integrity. This is
achieved by ensuring vigilance, enforcement and compliance and maintaining internal
control.

2.2 Theoretical Review

2.2.1 Endogenous Growth Theory

The endogenous growth model has been prominently advanced by many scholars;
Romer (1986); Lucas (1988); and Rebelo (1991) stating continuous progression can be
achieved endogenously (Ibrahim & Mohammed, 2020). The endogenous growth model
intends to resolve problems stemming from the neoclassical growth models like the
assumption economies cease growing at some level when not stimulated by exogenous
progress in technology (McCallum, 1996).

The endogenous growth model factors in the functions of organisations such as capital
market, money market and government in the roles played by them together with other

48
aspects of production like capital, labour, and human capital (Ibrahim & Mohammed, 2020).
Endogenous growth theory relates that the performance of economic growth is tied to income
circulation, technology and financial improvement (Odo, 2017). This theory was used to
underpin the works of Lenee & Oki (2017); Odo, (2017); Ibrahim & Mohammed (2020).

The key assumption of this approach is the elimination of the condition of

diminishing return on the factors of production because this leads to growth in production
without any limitations (Sredojevic, 2016). The endogenous growth model in studying
economic growth depends on econometric analysis using many variables to assess their
impact on econometric growth Sala-I-Martin 1997 (as cited in Sredojevic, 2016).

This theory was critiqued due to its dependence on some assumptions of the Neoclassical
theories which are not adequate for developing countries, it also has an unrealistic assumption
about the connections of sectors of the economy; it overlooks the many inefficiencies of
developing economies and the political nature and implications of innovation (Onyimadu,
2015).

Coskun, 2017 explored the affiliation between the developmental level of capital market sub-
components and economic growth in Turkey over the period from month one 2006 to month
six 2016. Economic growth was measured using GDP while capital market sub-components
were measured using stock market capitalization, sum of pension and mutual funds total asset
values, market capitalization of corporate bonds, stock market total traded value, the total
value of short-term and long-term government bonds, rate of employment, consumer index
and reel effective exchange rate. An ARDL, Markov switching regression and Kalman filter
model were used for analysis and findings showed long-run cointegrating concerning capital
market development and economic growth in Turkey. Results additionally revealed a
unidirectional causality from capital market development to economic growth in Turkey.
Finally, capital market development shows asymmetric effects on economic growth.

In a similar study, Oprea & Stoica (2018) investigated the impact of the capital
markets integration on economic growth in European Union (EU) countries and identified the
main factors through which capital markets' development influences economic growth using
panel data of EU countries from 2004 to 2016. The dependent variable was measured with
GDP growth, multifactor productivity while the independent variables were measured using
capital mobility, foreign portfolio investments, market capitalization, value traded, turnover
ratio, stock indices, unemployment rate, and immigrants. Analysis was executed using the

49
Autoregressive Distributed Lag Model which showed integration of capital markets has a
positive impact on economic growth. The main factors responsible for these positive effects
are stock market capitalization, capital mobility, value traded, stock indices, immigrants and
foreign portfolio investments.

Grbic (2020) examined the nexus between stock market development and economic growth
within the republic of Serbia from quarter one 2000 to quarter four 2018 i.e., using quarterly
time-series data. Real GDP was utilized as a dependent variable while independent variables
were measured by market capitalization, total value ratio and turnover ratio; these were
analyzed with Vector Autoregressive Model using Toda-Yamamoto-Dolado-Lutkhepohl
approach for granger causality check. It was discovered that a unidirectional Granger
causality is moving from stock market development towards economic growth.

2.2.2 Efficient Capital Market Theory

The theory states that an efficient market is one in which security prices adjust rapidly to the
infusion of new information and that current stock prices fully reflect all relevant and
available information about the affected security at any given time. Fama classified the
efficient market hypothesis into the weak –form, semi-strong form and strong-form market
efficiency, each depending on the nature of information available to each participant test of
efficiency (Gbarato, 2020).

According to Okereke, 2013, in an efficient market, the price of securities is a function of

relevant information concerning those securities. The authors argue that the capital market
theory is epitomised by the Random Walk (Efficient to market) Hypothesis which is based on
three issues:

Security prices reflect all available information about such securities;

Successive changes in security prices are independent;

There is no specific and recurring pattern in the behaviour of market prices of securities on
which basis a reliable trading rule could be formulated.

2.2.3 Random Walk Theory

Random Walk Hypothesis depicts random price movement and so such prices are
unpredictable and represent the weak form hypothesis. The strong form of the argument

50
consider that the information is available before decisions on market price and, so have no
regards for any information coming from private or public domain.

The importance of this argument hinges on efficient market delivery. This finds expression in
efficient allocation of resources at reduced cost and consideration for the role of information
in determination of stock prices. Such efficient functioning will facilitate more efficient
mobilization of fund and more economic allocation in the economy for optimal utilization in
an attempt to grow the economy.

2.2.4 Harrod-Domar Growth Model

The Marxian economic growth theory was led by Karl Marx. He made an economic
interpretation of history in which he indicated the motivating force of capital development
and suggested an alternative growth path (Nwikina, 2015). The materialistic interpretation of
history shows continuous economic struggles between different classes and groups in society
(Jhingan, 2016). Transformation of society hinges on mode of production and ownership of
capital.

Economic growth is traced to labour surplus. The surplus is defined as the difference between
labour value and the prevailing rate. Anyanwu and Oaikhenan (1995) note the possibility of
collapse of capitalism as a result of intensified class struggle. The clash is between the
bourgeoisie and proletariat, that is, the owners of capital and labour force.

2.2.4 The Market Size Theory

According to the market size hypothesis, the volume of shares (share index) in a host country
depends on its market size, which is measured by the sales of securities in that country, or by
the country’s GDP (i.e., the size of the economy). The market size is a measure of market
demand in the country. This is particularly dependent on the installation of infrastructures
within the economy of a given country in order to facilitate growth in the various sectors of
the economy.

Moreover, the capital market could grow larger if the government of a given country builds a
system of fidelity in the structure of the capital market. One way to test the theory’s validity
is to find out whether or not the share index of a given country correlates with the income
level of that same country. The empirical studies using this methodology seem to support the

51
hypothesis that higher level of income could accelerate the growth of the capital market
positively. The use of GDP as the different sectoral size has no obvious theoretical
foundation but it is used as potential measure of the sectoral economy in the literature.

2.2.5 The Efficient Market Hypothesis (EMH) Theory

The Efficient Market Hypothesis, according to Fama (1965) is an academic concept

which provides a framework for examining the efficiency of the capital market. According to
the EMH, financial markets are efficient prices on traded assets, have already reflected all
known information and therefore are unbiased because they represent the collective beliefs of
all investors about future prospects Olawoye (2011). It further explains that the neediness of
information as it relates to the capital market set as a preface in investors’ choice of stock and
securities and on the other end companies, agents and government battle for opportunities
that might be comprehended from the stock market.

In other words the EMH states that all relevant information is immediately and fully reflected
in a security’s market price. 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.
Using Egyptian data, Mecagni and Sourial (1999), applied the GARCH estimating
methodology to show that four of the popular stock market indices did not conform to the
efficient market hypothesis. Osei (2012), using Ghanaian data, explored the character of asset
pricing and the response to earning announcement on the Stock Exchange. He found that
abnormal and cumulative abnormal returns of selected securities were not efficient with
respect to annual earnings. Working with Nigerian data covering 1981 to 2008, Olowe
(2009), employed correlation analysis to show that the Nigerian stock market was weak form
efficient.

The theoretical work that will be adopted as a guide in setting the a-priori expectation for the
empirical findings for this research among the portfolio theory, market size theory and the
efficient market hypothesis. The market size theory is going to be used among other theories
in checking the result of the hypotheses, answering the research questions and setting the a-
priori expectation. The market size theory discussed the theories that related to the variables
meant to be analyzed in the research model and test of hypotheses. The variables; number of
shares, value of shares, capitalization, dividend, earnings per share and Revenue which are

52
characterized in the model is relatively discussed in the theory enabling the relevance of the
theory to the research.

2.3 Empirical Review

There have been growing concerns and controversies on the role of the stock market
on economic growth and development. While some posits a positive link, others maintain a
negative one and others still, does not find any evidence at all. The study reviews several
related and recent empirical literatures.

Abayomi and Yakubu (2022) examined the impact of the capital market on the economic
growth of Nigeria spanning the period of 1990 to 2020. The study used the Autoregressive
Distributed Lag (ARDL) model on the variables of economic growth (proxied by RGDP),
equity, government securities, bond, preference shares, and Foreign Direct Investment (FDI)
to carry out the study. The analysis's findings indicate a long-term relationship between
capital market development and economic growth. According to the ARDL Bound test,
government stock, bonds, and preference shares have a negligible negative relationship with
economic growth, whereas equity and government stock have a strong positive relationship
with economic growth. In a similar study, but with different variable specification,
Omimakinde and Otite (2022) examined the impact of capital market reforms on economic
growth in Nigeria using Ordinary Least Square (OLS) technique on an annual times series
data-set spanning the period of 1985-2020. The variables of Gross domestic product (GDP),
market capitalization, all share index, value of transaction, number of listed companies,
number of deals, inflation rate, and interest rate were used in carrying out the study. Findings
from the study revealed that market capitalization, interest rate and number of deals had
significant positive impact on Nigeria’s GDP while all share index, number of listed
companies, value of transaction and inflation rate were found to retard growth.

Omodero and Alege (2022) investigated the effect of each type of government bond
on economic growth in Nigeria from 2003 to 2019. The study used the multiple regression
analysis on an annual time series dataset of GDP, treasury bills; Federal Government of
Nigeria’s (FGN) bond; treasury bond; and inflation rate. The results show that FGN bonds
and Treasury bills have a positive and significant impact on Nigeria's economic growth. On
the other hand, inflation and Treasury bonds have a significant and adverse impact on growth.
Other government obligations and bonds, however, have only a minimal negative impact on

53
economic expansion. In a similar study, Ihenetu and Iwo (2022) evaluated the effect of the
capital market on economic growth in Nigeria covering the period of 1999 to 2020. The study
used OLS technique on an annual time series data-set of GDP, market capitalization, all share
index, and new issued funds. The findings revealed that market capitalization had a positive
and significant effect on GDP; all share index had a negative and significant effect on GDP;
and new issue funds had no significant effect on GDP during the period of the study.

Like Ihenetu and Iwo (2022), Bello et al. (2022) evaluated the impact of capital
market performance on economic growth in emerging nations from 2012 to 2022. The
research used content analysis to review relevant empirical studies. To examine the effects of
capital market performance on economic growth in developing nations using empirical
evidence, it specifically used a qualitative method employing descriptive synthesis.
According to the analysis, 30% of empirical findings from studies of the capital markets and
economic growth in developing countries do not match what would be expected a priori
(implying that their impacts were insignificant). The study comes to the conclusion that time
series analysis employing various variables and methods in emerging nations yields
conflicting results.

Bringing the study back to Nigeria, Udofia et al. (2022) probed the effect of the Nigerian
capital market on industrial development for the period of 1986 and 2018. The study used the
Error Correction Model (ECM) on an annual time series data-set of industrial production
index, gross fixed capital formation, industrial loan, and market capitalization. Like some
previous studies, the study's conclusions showed that the Nigerian capital market has a
positive and significant long-term and short-term impact on the performance of the industrial
sector. Also, within the Nigerian economy, Babatunde, 2021 examined the effects of capital
market development on the Nigerian economy from 1987 to 2018. The study used the OLS
technique and an annual time series data-set comprising of GDP, market capitalization, and
value of transactions. The result of the study revealed that that market capitalization has a
positive influence on GDP while value of transactions has a negative and insignificant
influence on GDP. Still in Nigeria, Ugbogbo and Aisien (2019) examined the impact of
capital market development on economic growth using annual time series data for the period
1981 to 2016. The ECM technique was used to carry out the study’s estimation. The variables
of Real GDP, market capitalization (proxy for capital market development), interest rate,
money supply, and gross fixed capital formation were used in carrying out the study’s
empirical analysis. The empirical finding showed that the expansion of Nigeria's capital

54
market has a considerable and favorable impact on economic growth over the long and short
terms.

Expanding the scope of the study to Africa, Ngong, 2022 investigated the bond
between stock market development and agricultural growth in African emerging economies
from 1990 to 2020. The economies consist of Botswana, Egypt, Ghana, Kenya, Mozambique,
Nigeria, South Africa, Tanzania, Tunisia, Uganda, and Zambia. Agricultural value added to
GDP is the measure for agricultural growth; market capitalization, and stock value traded are
the proxies for stock market development; the broad money supply (M2/GDP), physical
capital, and labour were the control variables of the study. Using a Fully modified OLS
(FMOLS) and dynamic OLS (DOLS) estimators, the study found that market capitalization
has a negative impact on agricultural growth while stock value exchanged has a positive
impact. The results also demonstrated a bidirectional causal relationship between labor and
the value added to agriculture, as well as a one-way causal relationship between the added
value to agriculture and market capitalization and stock value exchange. Similarly, Antwi et
al. (2021) assessed the role of monetary policy on the stock market and economic growth
nexus in Ghana covering the period of 1990 to 2019. The study used the ARDL model on the
variables of market capitalization, commercial bank growth, inflation, labour, capital stock,
and trade openness. Findings showed that economic growth, both in the short and long-run, is
significantly and positively impacted by stock market development. The study also
discovered evidence in favor of a strong link between monetary policy and economic
development.

Azimi (2022), extending the study to Asia, used Nonlinear Autoregressive Distributed
Lags (NARDL) and Dynamic Multiplier methods on a quarterly time series spanning from
2003Q1 to 2019Q1 to investigate the impact of capital and money market determinants on
economic growth in China. The variables used in the study are per capita GDP growth,
market capitalization, total stock traded, stock market turnover, money market rate, real
interest rate, annual growth rate of the broad money, gross fixed capital formation, and net
foreign direct investment. According to the findings, positive (negative) shocks to the money
market rate reduce (raise) economic growth, whereas negative (positive) shocks to the real
interest rate and total liquidity spur (restrain) growth in the short term. This supports the long-
term link and asymmetric nexus among the indicators. Additionally, the results demonstrate
that shocks to market capitalization and stock market turnover, both positive and negative,
boost economic growth, whereas short- and long-term shocks to total stock trading stunt it.

55
Also, the results of the error-correction component demonstrated that short-run asymmetries
adjust to their long-run equilibrium at a predictable rate, indicating that enhanced financial
institutions attract high-quality financial projects that lead to sustainable and long-term
economic growth.

The literature review showed that there hasn't been enough formal research into how
well financial intermediation within Nigeria's capital market supports investments that
promote growth. Ngong, 2022) study attempted to capture financial intermediation, but it was
a cross-country analysis. Similar to this, Ugbogbo and Aisien (2019) made an effort to use
the money supply to capture financial deepening, but their scope (1981 to 2016) did not
include recent trends in Nigeria's capital market. In order to confirm the effect and offer a
thorough explanation, this study uniquely utilizes current trends to examine the relationship
between market capitalization and economic growth as well as how the transmission
mechanism through effective financial intermediation may affect this relationship.

Atje and Jovanovic (1993) found in a cross-country study of stock and economic growth of
40 countries from 1980 to 1988 that there was a significant correlation between the average
economic growth and stock market capitalization.

Osinubi (1998) employed the neoclassical growth model with a time series data on all
variables(ones he used) of GDP which was subjected to Augmented Dickey-Fuller unit Root
Test and which spanned from 1980 to 2000 to come to the conclusion that a positive
relationship exists between the economic growth and the measures of stock market
development used. He however, pointed out that the relationships are statistically
insignificant which goes further to show that the effect of stock market on economic growth
is weak and insignificant.

In examining whether a strong empirical association exists between the stock market
development and long-run economic growth, Levine and Zervos (1996) used pooled cross
country time series regression of forty-one countries from 1976 to 1993. The growth rate of
Gross Domestic Product per capita was regressed on a variety of variables designed to control
for initial conditions, political stability, and investment in human capital and macroeconomic
conditions. Conglomerated index of stock market development was also included. A strong
correlation was discovered to exist which implied a positive relationship between stock
market development and economic growth.

56
Okpara (2010) analysed the capital market performance and the growth of the Nigerian
economy. A co-integration approach was used for the analysis of data. He used the real gross
domestic product (as a proxy for development indicator) on the market capitalization, new
issues, value of shares traded and turnover ratio as capital market indicators. It showed a
long-run relationship between the growth of GDP and the capital market indicators.

Adamu and Sanni (2005), examine the roles of the stock market on Nigeria’s
economic growth, using Granger-causality test and regression analysis. They discovered a
one-way causality between GDP growth and market turnover. They also observed a positive
and significant relationship between GPD growth and market turnover ratios. The authors
advised that government should encourage the development of capital market since it has a
positive effect on economic growth. Chinwuba and Amos, (2011), examine the impact of the
Nigerian capital market performance on the economic development of Nigeria by using the
Ordinary least Square regression model. The result indicates that the performance of the
capital market impact positively on the economic growth of Nigeria.

Osinubi and Amaghi onyeodiwe (2003) examine the relationship between Nigeria stock
market and economic growth during the period 1980 to 2000, using Ordinary least square
regression. The results show that there is a positive relationship between the stock market
development and economic growth. They therefore suggested that government should pursue
policies that are geared toward rapid development of the stock market. Abu (2009) examines
whether stock market development raises economic growth in Nigeria, by employing the
Error Correction Approach. The econometric results indicate that stock market development
raises economic growth. He however encouraged SEC to facilitate the growth of the market,
restore the confidence of stock market participants and safeguard the interest of shareholders
by checking sharp practices of market operators.

Nyong (1997) developed an aggregate index of capital market development and used
it to determine its relationship with long-run economic growth in Nigeria. The study, which
employed a time series data from 1970 to 1994, used four measures of capital market
development; ratio of market capitalization to GDP (in %), ratio of total value of transaction
on the main stock exchange to GDP (in %), the value of equities transactions relative to GDP
and listing. These measures were combined into one overall composite index of capital
market development using principle component analysis. A very negative and significant

57
correlation between capital market development and the long run growth in Nigeria was
posited as the result of this study.

In appraising the impact of the capital market efficiency on the economic growth of Nigeria,
using a time series data from 1961 to 2004, Ewah et al (2009) found out that though the
Nigerian capital market has the potential of growth inducing, there has not been any
meaningful contribution to the economic growth of Nigeria. This, they said, was due to low
market capitalization, low absorptive capitalization, illiquidity, misappropriation of funds etc.
Harris (1997) did not find hard evidence that stock market activity affects the level of
economic growth.

Barro and Romer (1989) using cross country data spanning several years indicated very
significant relationship between per capita output, growth rate and financial market
development.

58
2.4 Conceptual Model

Independent Variables Dependent Variable

Capital Market

Market Capitalization

Volume of GDP

Transactions (Revenue)

Total New Issue

Listed Equities

Conceptual Model

Source: Researcher’s Compilation 2023

59
2.5 Gap in Literature

Investment in capital market raises capital for use in productive activities. Investors also
recoup dividends, which increases money supply towards other economic activities. In this
sense, capital market holds benefits for the economy in terms of both forward and backward
linkages. On the other hand, capital market is viewed to not be a great contributor to
countries’ economic performance. With such inconclusive views on the relationship between
capital market development and growth however, it is difficult to take a stance on its benefit
to economies. In the presence of such ambiguities, it makes it difficult to make policy
decisions in terms of prioritising it as a segment of the economy to enhance growth.

This study is therefore important in clearing up these ambiguities in order to assist both
policy makers and the private sector to make decisions in terms of:

Prioritising capital market and the growth for their expected contribution to economic
growth;

Undertaking regulatory reforms to ensure proper functioning of capital market;

Reforming regulations to allow for a greater variety of products offered on capital market,
while at the same time ensuring that these products do not have unwanted economic
consequences;

Advocating for capital market as a preferred method of investment over other forms of
investment.

In terms of literature, the subject is widely researched across the world. And although there
have been studies done for individual markets, there are very few focusing on the Southern
Africa region as a whole examining capital market as a contributor to economic growth. The
study is therefore important in this respect.

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 CHAPTER THREE

METHODOLOGY

Preamble

This chapter explains the methods that will be used in carrying out the research. Based on
this, the chapter will discuss the following: the research design, population of the study,
sample size, sampling technique, source of data, method of data collection, method of data
analysis, validity and reliability of data instrument, model specification and measurement of
variables.

3.1 Research Design

Research design refers to the specification of methods and procedures for acquiring the
information needed for a research study. Omojefe, (2014) also explained it as a model proof
that allows the researcher to draw inference concerning relations among the variables under
investigation. The research study is geared towards investigating and examining the Capital
Market Development and Nigeria Economy. However, the researcher had chosen a cross-
sectional descriptive survey of Nigeria Stock Exchange (NSE). A descriptive survey is
concerned with the process of collecting data in order to test hypotheses and to answer
questions concerning the current status of the phenomena under study. This research design
demonstrates the relationship between the dependent variable and independent variable.

3.3 Population of the Study

Population refers to the totality of all conceivable elements or subjects relating to a particular
phenomenon of interest to the researcher. The subjects or elements are the individual items
that make up the population, which may be observed or physically counted (Tahir, 2012).

The population of the study constitutes all the companies quoted on the Nigerian Stock
Exchange, because the study has to do with the performance of the capital market on the
Nigerian economy. It comprises 360 employees of Nigeria Stock Exchange, Lagos. The
population of this study therefore, consists of all the 360 employees in marketing service. A
disproportionate stratified sampling technique will be used to select the desired sample in
each category of the stratum of participating employees. This technique will ensure that

61
subjects drawn from each stratum will be proportionate to the number of elements in the
stratum. A total of 360 employees will be sampled to participate in the study.

3.4 Sample Technique

For the purpose of this research study, the purposive sampling technique was adopted to
allow all the population of the employees working in the companies in the capital market
quoted on the Nigerian Stock Exchange considered.

3.5 Sample size

The sample size may be large or small depending on the nature of the population of interest.
The actual population of the study is three hundred and sixty (360). Based on this population,
the sample size will be determined at 95% level of confidence and 5% error tolerance using
Taro Yamane’s sample size determination formula.

The formula is stated below.

n = N

1 + Ne2

Where n = the sample size

e = level of significance (proportion of sampling error

1 = constant value

N = the finite population size

The sample size for this study was therefore:

N = 360

n = 1 + 360(0.05)2

n = 1 + 360(0.0025)

n = 1 + 1.9

n = 2.9

62
n = 360
2.9

n = 124.1

n = 124

This gives a sample size of 124

The designated organizations were properly represented using proportionality formula.

Thus: Q = A/N x n/1

Where:

Q = the number of the questionnaire allocated to each selected construction firm

A = the population of each construction firm

N = the total population of all selected firm

n = the estimated sample size used in the study.

3.6 Source of Data

The main sources of data for this research study were generated from primary data. The
primary data were collected through the administration of well-structured questionnaire
designed for the study and by interview which are instruments of the survey method of
research while secondary data were gotten from several sources which include text books,
journals, annual reports, internet, and magazines.

3.7 Method of Data Collection

The data used for this research study were collected through administration of well-structured
questionnaires to the employees working with organizations at the capital market recognized
by the Nigerian Stock Exchange (NSE) and Security and Exchange Commission (SEC).

3.8 Method of Data Analysis

The study makes use of frequencies (f) to show the number of times each score occurred. The
frequencies will be converted to percentages (%), which will enable the researcher compare

63
the responses meaningfully. Translating frequency counts into percentages showed the
number per hundred compared, using a common base of “100” for comparison.

The statistical software package; SPSS 20.0 were used for analysis. Statistical techniques
such as linear regression model, t-test, ANOVA were applied.

Regression analysis is used to determine if there is a relationship between survey results

related to each independent variable and the dependent variable. The F-test shows the overall
significance of the model. When the alpha is greater than the significant F, the null
hypothesis is rejected and the overall model is significant. The F value shows the explained
variations and how likely the model is the result of a random outcome. The Adjusted R
Square determines the variance that is explained by the regression model; the more variance
that can be explained by the regression model, the more dependable the model.

Decision Rule

In other to carry out regression analysis model, the Statistical Package for Social Sciences
(SPSS) were used to determine the outcome. The procedure entails a description of the
dependent and independent variables. In this case capital market is considered the
independent variable; while economic growth of the country is the dependent variable. SPSS
was run and the output shows the constant (bo) coefficient of regression were (β) is obtained.
The output shows that P- values the coefficient that resulted in either rejecting or failure to
reject the hypothesis at 5% level of significance.

The P-value therefore indicates that the probability of getting result that show the critical
value. The null hypothesis is rejected if the p-value is less or equal to the critical value. The
output of the study equally shows the coefficient determination (R2), which measures the
proportion of the dependent variable that can be explained by the regression model. The P-
value of less than or equal to critical value of the null hypothesis is rejected, there will be a
slope between the variables. In this case, linear relationship will exist when the P-value or
significance level is less than or equal to the critical value.

3.9 Validity and Reliability

The research instrument used for this research will be validated by ensuring the questions are
structured in a manner that will enable the research obtain information relevant to the purpose
and objectives of the study. The research instrument was validated by my supervisor before it
was been was distributed for field work. However, in order to maximize reliability of the

64
instrument used, the investigator ensured that questions were not ambiguously presented to
the respondents in a manner that will likely communicate different meaning that could
generate inaccurate and inconsistent responses. The researcher also maintained objectivity by
not fielding leading questions. Pilot surveys using the instruments were carried out to ensure
validity and reliability.

3.10 Model Specification

The model to be used for this investigation is the adaption and modification of the work of
Uchenna and James (2016).This relationship is designed on a linear regression model
assuming a linear relationship between the variables. The model is given as:

Y= a + bx

GDPt = a0t + a1tMCAPt + a2tTNIt + a3tVLTt+ a4tLEQt + ℮t

Where:

GDP = Gross Domestic Product

a0 = Regression Constant

a1 – a4 = Coefficient of independent variables.

MCAP = Market Capitalization

TNI = Total New Issues

VLT = Volume of Transactions

LEQ = Listed Equities

℮ = Stochastic Error term (Disturbance term)

t = Time series

3.11 Measurements of Variables

The study used dependent and independent variables. The dependent variable is the economic
growth which is proxied by Gross Domestic Product (GDP) while the independent variable is
concerned with the following indices: Market capitalization, total new issues, volume of
transaction and total listed equities.

65
 Variable Measurement
S/N Variable Symbol Measurement of Variables

1 Gross Domestic Product GDP C+G+I+X–M

2 Market Capitalization MCAP Number of shares of the company x Market

share price

3 Total New Issues TNI Existing number of shares / New number of

shares

4 Volume of Transaction VLT Total number of shares traded / Total number

of shares outstanding

5 Listed Equities LEQ Total Debt / Net worth

66
 CHAPTER FOUR

DATA ANALYSIS, PRESENTATION AND DISCUSSION OF FINDINGS

4.0 Preamble

This chapter is concerned with the analysis of the data collected during the course of the
investigation of the study. The research study collected useful data from respondents
comprising of consumers, distributors, and the company’s personnel to evaluate the effective
of capital market for improved Nigeria economic growth, using Nigeria Stock Exchange as the
case study.

4.1 Data Presentation

From a total of one hundred and twenty four (124) copies of the questionnaire distributed to the
respondents, the whole one hundred and twenty four (124) copies representing 100% were duly
completed and returned. All the tables are illustrated in percent.

Table 4.1: Age Distribution of Respondents

Item No of Responses Percentage (%)

Below 18-25 years 65 52.4

Below 25 – 35 years 33 26.6

Below 35 – above 50 years 26 20.9

Total 124 100

Source: Field Survey 2023

The analysis of the table 4.1 reveals that the age below 25-35 years have 52.4% and the majority
below 18-25 years have 26.6% while below 35-50 years have 20.9% of the total respondents.
The result implies that majority of the two organization’s staff’s falls within the age bracket of
25-35 years. This is an indication that Nigeria Stock Exchange has youthful and vibrant banking
sector that will see effective managing the bank.

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 Table 4.2 Gender Distribution

Item No of Responses Percentage (%)

Male 82 66.1
Female 42 33.8
Total 124 100

Source: Field Survey 2023

The analysis of 4.2 reveals 66.1 percent of the respondents are male while 33.8% of
the respondents are female. Since the difference between male and female staffs is much in
the market, the maintenance of market is ensured.

Table 4.3: Years of Service in the Organization

Item No of Respondents Percentage (%)

Below 5 years 48 38.7

Below 5-10 years 40 32.2

Above 10 years 36 29.0

Total 124 100

Source: Field Survey 2023

Analysis of table 4.3 shows that 38.7% of the respondents have spent below 5 years in the
bank, 32.2% of the respondents have spent below 5-10 years in the sector while 29.0% of the
respondents have spent above 10 years in the sector. The finding is an indication that
majority of the staff have stayed in the market long enough to understand the importance of
capital market on economic growth in Nigeria of selected Nigeria stock market.

68
 4.3 TEST OF HYPOTHESES

H0: There is significant relationship between capital market and Nigerian economy

HI: There is no significant relationship between capital market and Nigerian economy

Table 4.8: Table of Correlation between Effective Capital Market and Economic

Growth

Correlations
Pearson Correlation Effective capital level of economic
market growth
effective capital market Sig. (2-tailed) .536 **

N .000

Pearson Correlation 124

level of performance Sig. (2-tailed)

N 124 124
.536 **

.000

124

**. Correlation is significant at the 0.01 level (2-tailed).

According to above calculations it is observed that amount of correlation coefficient between

level of economic growth and effective capital market is equal to 53.6 per cent and
considering that a significant level is less than 5%. Then we can say that there is a positive
relationship between effective capital market and marketing sector. This implies that one
percent increase in effective capital market will lead to 53.6% increase in level of growth
economic.

Regression analysis test of level of economic growth and capital market

Model Summary
Model R R Square Adjusted R Square Std. Error of the

Estimate

1 .965a .716 .586 3.79952

a. Predictors: (Constant), effective capital market

69
Regression coefficient of R = .965 or 96.5% indicate that relationship exist between independent
variables and dependent variable. The coefficient of determination R 2 = 0.716 which show that
71.6% of variation in level of marketing sector explained by effective capital market The
adjusted R-square in the table shows that the dependent variable, (level of economic growth) is
affected by 58.6% by independent variable (effective capital market). It shows that effective
capital market is responsible for level of the selected market in Nigeria.

Coefficientsa
Model Unstandardized Standardized T Sig.

Coefficients Coefficients

B Std. Beta

Error

1 (Constant) 12.31 .901 13.656 .002

effective capital 0

market .085 .536 12.426 .000

1.056

a. Dependent Variable: level of capital market

The coefficient of determination for effective capital market is positive (1.056) and is highly
significant (0.001) in ensuring level of development. The p-value of 0.000 is less than the t-
statistic value of 12.426 and the standard error value of 0.085. This implies that a unit
increase in effective capital market will lead to 1.056 increases in level of development.
Therefore, the null hypothesis is rejected and alternative hypothesis accepted that there is a
relationship between the effective capital market on the selected market in Nigeria and the
level of economic growth.

70
Hypothesis two

H0: The deficiencies of Nigerian stock exchange market do affect Nigerian economy

H2: The deficiencies of Nigerian stock exchange market do not affect Nigerian economy

Table 4.9: Table of correlation between Nigeria Stock Exchange and improving the

Nigeria economic growth of the selected market

Correlations
Capital improving the

market economic

growth

Pearson Correlation 1 .473**

Capital market Sig. (2-tailed) 124 .000

N 205

Pearson Correlation .473 ** 1

improving the economic growth Sig. (2-tailed) .000 124

N 205

**. Correlation is significant at the 0.01 level (2-tailed).

According to above calculations is observed that amount of correlation coefficient between

capital market and improving in the economic is equal to 47.3 per cent and considering that a
significant level is less than 5%. Then we can say that there is a positive relationship Nigeria
Stock Exchange and improving in the Nigeria economic growth. This implies that one
percent increase in capital market will lead to 47.3% increase in improving in the economic
growth.

71
 Regression analysis test of capital market and economic growth

Model Summary
Model R R Square Adjusted Std. Error of

R Square the Estimate

1 .773 a .624 .722 3.96426

a. Predictors: (Constant), capital market

Regression coefficient of R = .773 or 77.3% indicate that relationship exist between

independent variables and dependent variable. The coefficient of determination R2 = 0.624
which show that 62.4% of variation in improving the economic growth is explained by e-
banking. The adjusted R-square in the table shows that the dependent variable, (improving
the growth is affected by 72.2% by independent variable (capital). It shows that there are
positive impacts of capital market on improving the Nigeria economic growth of the selected
market in Nigeria.

Coefficientsa
Model Unstandardized Standardize T Sig.

Coefficients d

Coefficients

B Std. Error Beta

1(Constant) 15.036 .806 18.644 .000

Capital 1.319 .125 .473 10.520 .000

market

a. Dependent Variable: improving the economic growth

The coefficient of determination for capital market is positive (1.319) and is highly
significant (0.000) in improving in the economic growth. The p-value of 0.000 is less than the
t-statistic value of 10.520 and the standard error value of 0.125. This implies that a unit
increase in capital market will lead to 1.319 increases in improving in the economic growth.

72
 Therefore, the null hypothesis is rejected and alternative hypothesis that there are positive
impacts of capital market on improving in the selected market in Nigeria.

Hypothesis three

H0: The crises of Nigerian stock exchange positively affect Nigerian capital market

H3: The crises of Nigerian stock exchange negatively affect Nigerian capital market

effective Capital
marketing market
affects economic

Pearson Correlation 1 .499**

effective planning, controlling Sig. (2- 124 .002

tailed)
and coordinating 124
N
Pearson Correlation .499 ** 1

Capital market Sig. (2-tailed) .002 124

N 124
**. Correlation is significant at the 0.01 level (2-tailed).

According to above calculations is observed that amount of correlation coefficient effective

planning, controlling and coordinating and capital market is equal to 49.9% and considering
that a significant level is less than 5%. Then can say that there is a positive relationship
between capital market and effective planning, controlling and coordinating. This implies that
the crises of Nigerian stock exchange negatively affect Nigerian capital market will lead to
49.9% increase in marketing

73
Regression analysis test of the crises of Nigerian stock exchange negatively affect

Nigerian capital market

Model Summary
Model R R Square Adjusted Std. Error of

R Square the Estimate

1 .899a .849 .747 3.90132

a. Predictors: (Constant), capital market affects economic growth

Regression coefficient of R = .899 or 89.9% indicate that relationship exist between

independent variables and dependent variable. The coefficient of determination R2 = 0.849
which show that 84.9% of variation in capital market is explained capital market affects
economic growth. The adjusted R-square in the table shows that the dependent variable,
(capital market) is affected by 74.7% by independent variable (effective planning, controlling
and coordinating). It shows that effective marketing affects customer is responsible for
capital market in the marketing sector.

Coefficientsa
Model Unstandardized Standardized T Sig.

Coefficients Coefficients

B Std. Beta

Error

1(Constant) 16.9 .593 28.596 .000

60

Capital market 1.73 .154 .499 11..257 .002

affect economic 3

growth

a. Dependent Variable: capital market

74
The coefficient of determination for effective planning, controlling and coordinating is
positive (1.733) and is highly significant (0.002) in ensuring capital market is well carried
out. The p-value of 0.000 is less than the t-statistic value of 11.257 and the standard error
value of 0.154. This implies that a unit increase in effective planning, controlling and
coordinating will lead to 1.733 increases in capital market. Therefore, the null hypothesis is
rejected and alternative hypothesis that Organization makes use of effective marketing affects
customer of this capital market.

Table 4.10: Table of correlation between capital market and stock exchange challenges

Correlations
Challenges Capital market
Pearson Correlation 1 .697**

Capital market Sig. (2-tailed) 124 .000

N 420
Pearson Correlation .697** 1

Capital marketSig. (2-tailed) .000 124

N 124
**. Correlation is significant at the 0.01 level (2-tailed).

According to above calculations is observed that amount of correlation coefficient between

capital market and economic challenges of the selected market is equal to 69.7 per cent and
considering that a significant level is less than 5%. Then can say that there is a positive
relationship between capital market and selected market in Nigeria.

Regression analysis test of capital market and economic challenge of the selected market

Model Summary
Model R R Square Adjusted Std. Error of

R Square the Estimate

1 .997a .986 .985 3.22600

a. Predictors: (Constant), capital market

75
Regression coefficient of R = .997 or 99.7% indicate that relationship exist between
independent variables and dependent variable. The coefficient of determination R2 = 0.986
which show that 98.6% of variation in economic growth of the selected market is explained
by solutions to capital market. The adjusted R-square in the table shows that the dependent
variable is affected by 98.5% by independent variable. It shows that barriers are responsible
for economic growth.

76
Hypothesis Four

H0: Capital Market plays a significant role in developing Nigerian Economy

H4: Capital Market did not play a significant role in developing Nigerian Economy

Table 4.10: Table of correlation between capital market and role of Nigeria economic

Correlations
Role of Capital economic

economi

Pearson Correlation 1 .697**

Role of economic Sig. (2-tailed) 124 .000

N 124

Pearson Correlation .697** 1

Capital marketSig. (2-tailed) .000 124

N 124

**. Correlation is significant at the 0.01 level (2-tailed).

According to above calculations is observed that amount of correlation coefficient between

capital market and role of Nigeria economic is equal to 69.7 per cent and considering that a
significant level is less than 5%. Then can say that there is a positive relationship between
role of Nigeria economic and capital market.

Regression analysis test of Capital Market and its significant role in developing
Nigerian Economy
Model Summary
Model R R Square Adjusted Std. Error of

R Square the Estimate

1 .997a .986 .985 3.22600

77
a. Predictors: (Constant), capital market

Regression coefficient of R = .997 or 99.7% indicate that relationship exist between

independent variables and dependent variable. The coefficient of determination R2 = 0.986
which show that 98.6% of variation in role of economic of Nigeria is explained by solutions
to capital market. The adjusted R-square in the table shows that the dependent variable is
affected by 98.5% by independent variable. It shows that capital markets are responsible for
Nigeria economic growth.

Coefficientsa
Model Unstandardized Standardized t Sig.

Coefficients Coefficients

B Std. Error Beta

1(Constant) 11.526 .637 18.083 .000

Capital market 3.254 .171 .697 19.038 .000

a. Dependent Variable: economic growth

The coefficient of determination for capital market is positive (3.254) and is highly
significant (0.000) in ensuring role of economic growth. The p-value of 0.000 is less than the
t-statistic value of 19.038 and the standard error value of 0.171. Therefore, the null
hypothesis is rejected and alternative hypothesis that there are solutions to the capital market
experienced by the firm in economic growth.

Coefficientsa
Model Unstandardized Standardized t Sig.

Coefficients Coefficients

B Std. Error Beta

1(Constant) 11.526 .637 18.083 .000

Capital market 3.254 .171 .697 19.038 .000

a. Dependent Variable: economic growth

78
The coefficient of determination for barriers is positive (3.254) and is highly significant (0.000)

in ensuring the performance. The p-value of 0.000 is less than the t-statistic value of 19.038

and the standard error value of 0.171. Therefore, the null hypothesis is rejected and alternative

hypothesis that the Capital Market plays a significant role in developing Nigerian Economy is

accepted.

4.4 Summary of Findings

In line with issues raised in the policy implications, the recommendation is that the relevant
regulatory agencies in the capital market should be focused on enhancing the efficiency and
transparency of the market in order to improve investor’s confidence. Also, there is need for
effective and favourable macroeconomic environment to facilitate the causality from stock
market to economic growth. It must be understood that growing economies with significant
and consistent impact on living standards of the people are a product of effective social,
economic and political institutions and this is a major setback in the Nigerian environment.
Thus there is the need to ensure that the channels of capital market induced growth are built
around effective systems and that the policy institutions are actively involved in making
systemic checks and appropriate policy innovations to ensure capital market led economic
growth.

This study has developed a prudent multiple regression model for the purpose of explaining
and analyzing empirically, the impact of capital market performance on economic growth in
Nigeria. Using multiple regression analyses to model development, the study estimates the
relationship between four explanatory variables; market capitalization, total new issues,
volume of transaction and listed equities and one explained variable, Gross Domestic
Product, by means of the ordinary least square technique.

The study hypothesized a significant impact between the four explanatory variables and the
Gross Domestic Product and the findings of the research are based on the Pearson Correlation
and SPSS v20. The result of the study reveals that the four predictor variables market
capitalizations, total new issues, volume of transaction have an aggregate significant impact
at 1 per cent level of significance and listed equities is at 5 per cent level of significance on
the GDP.

79
The foregoing provided the justification for the rejection of all the null hypothesis of the
study. The study also reveals that market capitalization, has the highest impact on the GDP
followed by total new issues and then the volume of transaction and finally listed equities.

4.5 Discussion of Findings

The relationship between economic growth and capital market is one that that attracted
attention across researchers. The intriguing observation across a number of these studies is
the heterogeneity in empirical findings over what may be termed a considerably uniform
theoretical framework at least with regards to causality. The finding of this study suggest that
of the four capital market variables examined, two (New issues and Value of transaction)
were found to exhibit a positive and statistically significant relationship with economic
growth measured by GDP. On the contrary, Market capitalization (MKTCAP) and Total
listing (TOLIST) exhibited inverse relationship with economic growth. Though, studies that
have provided evidence in this regards did not clearly disaggregate the capital market indices,
this study adopts that approach and show differences in the relationship between the
disaggregated capital market indicators and economic growth. This could stimulate dialogue
on the reason for such outcomes and the implication for policy simulation. With regards to
the study findings, Harris, (1997) re-examined the empirical relationship between capital
market and economic growth and in contrast to Atje and Jovanovic (1993), he found no hard
evidence that the level of capital market activity helps to explain growth in per capita output.
Atje and Jovanovic, (1993) present a cross country study of capital market and economic
growth over the period 1980-1988. They found a significant correlation between average
economic growth and stock market capitalization for 40 countries. Kim and Singal, (2000),
Bekaert and Harvey, (2000), Henry, (2000), and Bekaert, 2003 have all argued that stock
market does have positive effects on the economy since it reduces the equity cost of capital
and encourages information efficiency.

Furthermore, Singh, (1997), Stiglitz, (2000), Allen and Gale, (2000) and others have argued
that stock markets increases the level of capital mobility which in turn increases the
speculative activities and market volatility leading to crashes. Irving, (2004) considered the
links between capital market and overall socio-economic development to be tenuous, non-
existent or even harmful. Osei, (2005) and Nzue, (2006) examined the relationship for the
Ghanaian and Ivorian economies respectively. The studies revealed that stock market

80
performance granger-causes economic growth. The policy implication of the study findings
and others also examined raise several policy issues which need to be addressed so as to will
reinforce the link between the stock market and economic growth in Nigeria. We identify
them as follows; management of the capital market and quoted companies have resulted in
adverse decline in the spate of activities in the stock market and there is a need to pursue
policies that will reverse this trend.

Firstly, the Nigerian capital market currently is confronted with a crisis of confidence of
investors on the market. The effect of the financial crisis coupled with the revelations of
corporate malfeasance both by management of the capital market and quoted companies have
resulted in adverse decline in the spate of activities in the stock market and there is a need to
pursue policies that will reverse this trend

Secondly, given that the stock market operates in macroeconomic environment, it is therefore
necessary that the environment must be an enabling one in order to realize its full potentials.
Again, the determination of stock prices should be deregulated as well and Market forces is
allowed to operate without any hindrance. Interference in security pricing is inimical to the
growth of the market and should be under checks.

4.6 Implication of Findings

From the results reported above, the following policy implications are drawn. Firstly, since
capital market performance is proxied by market capitalization, total new issues, volume of
transaction and listed equities have statistical positive impact on economic growth, it implies
that market capitalization increases the ability of firms to raise capital. Thus, firms will be
able to increase investment and expand production of goods and services which translates to
higher growth rate. It could therefore be postulated that once the real sector is buoyant in
terms of financing its elements. It should be expected that the sector will expand and
productivity will increase and that cost of production will decline because of the competitive
situation, availability of products, fall in prices etc. However, this goes a long way in
increasing the GDP as well as favouring other economic indices such as favourable balance
of payment, decline in inflation, higher purchasing power of currency etc.

Secondly, total new issues have also contributed positively to the economy based on its
standard deviation as shown in the Table above. This implies that, it has a significant impact
on economic growth in Nigeria because as new issues are floated on the floor of the exchange
(Stock Market) it also increases the volume of transaction traded on the stock market. This in

81
turn increases the amount of trade made in a year and equally increases the level of funds
traded in that period. This also increases the number of securities traded and invariably
improves the economic growth of the country.

Thirdly, the volume of transaction has also impacted positively on economic growth as seen
in Table. This implies that as more volume of transactions is recorded in the capital market it
affects the performance of the market significantly and positively. Ultimately this translates
into the number of turnover of securities which in turn contributes to the economic growth of
Nigeria. We can then infer that volume of transaction has a positive and direct relationship to
the economic growth of the nation and the development of the capital market. Economic
growth relies heavily on the quantum of volume of transaction in the market in order to
compete globally. Therefore, the Nigerian capital market still has a lot to deal with in terms
of the operation activities of the market in order to compete with the other capital markets of
developed countries.

Finally, listed equities are believed to be the least in terms of its contribution to the economy
as can be seen in the Table. The amounts of listed equities have been fluctuating and this
affects the activities and performance of the market. This could be as a result of the global
financial crisis which affected most of the world financial markets and the Nigerian capital
market is not an exception. Therefore, more needs to be done by the government in order to
improve and restore the confidence of investors back to the market.

82
 CHAPTER FIVE

SUMMARY, CONCLUSION, AND RECOMMENDATIONS

5.1 SUMMARY

The study examines Capital market development and Nigeria economy. Chapter one provided
the introductory part by giving a background of the study. The chapter discussed the
statement of the research problem. The chapter also highlighted the research questions and
hypotheses raised based on the purpose of the study. The significance of the study were also
stated.

Chapter two-reviewed related literature on problems and prospects of Capital market

development and Nigeria economy. The chapter looked at different authors’ definitions of
corporate governance and the financial performance of insurance companies and its activities
as it affects organisations’ reputation, customers’ patronage and brand loyalty. The chapter
also looked at how corporate governance responsibility adoption influences organisational
performance and profitability. How economical, social and environmental factors are
responsible for the poor performance of corporate governance in insurance companies
adoption were also extensively reviewed.

Chapter three discussed the research methodology. The chapter stated the type of research
designed adopted in the study. Linear Regression, SPSS Pearson Correlation Coefficient and
Panel Regression were used to analyse the data for the research study .

Chapter four dealt with data analysis, presentation and discussion of findings using Linear
Regression Analysis. The data were also analyzed and research hypotheses were tested with
Pearson Correlation Coefficient.

5.2 Conclusion

This study examines the impact of Nigerian Capital on the Economy on Nigeria. Results
show that Market Capitalization does not have effect on the economy. We therefore conclude
that the Nigerian Capital Market has not impacted significantly on the Nigerian economy
within the period under study. This indicates that the stakeholders of Capital Market in
Nigeria need to act in a right direction so that there can be improvement on Nigeria Capital

83
Market. These issues concerning ranging from the appointment of management team, to
instituting proper and efficient policies that will re-position the market for its proper function
in the society.

the study reveals that the capital market impact on economic growth via market
capitalization, market index, value of transaction and total listing of equity and government
stock. As it was observed market capitalization, government stock and value of transaction
are important capital market variables that are capable of influencing economic growth.
Hence the capital market remain one of the mainstream in every economy that has the power
to influence or impact economic growth therefore the organized private sector is to invest in
it. The market capitalization have not impact significantly on the GDP while volume of
transaction and total listed equities and Government stock have significant impact on the
GDP. The government is therefore advised to put up measures to stem up investors’
confidence and activities in the market and more foreign investors should be encouraged to
participate in the market for improvement in the declining market capitalization so that it
could contribute significantly to the Nigerian economic growth.

5.3 Recommendations

Based on the finding from the study we recommend that there is need to introduce and
implement policies that will increase the level and size of Market Capitalization in the
Nigerian Capital Market by the government through the Stock Exchange Market as increase
in Market Capitalization will surely increase fund availability for desired investment which in
turn will increase productivity of the Nation. The positive impact of total New Issues is an
indication that organizations operating in the country should open access to the public for
investment and by so doing make returns available to the investors thereby increasing an
average investors’ income. There is also the need to institute policies that will further
increase value of transaction in the market. This goes beyond mere regulatory measures but
should include but not limited to punitive measures to check fraud and other malpractices that
betray the trust from investor. Investors should be encouraged with necessary incentives so as
to increase the volume and value of equities being traded upon in Nigeria, thus widening the
coast of investment opportunities as well as increasing productivity. Even though the
relationship obtained from the annual Total Listed Equities is very weak, increase in Total
Equities will surely but may be insignificantly impact on the economy and as such should be

84
encouraged. Lending rates should be controlled in a manner that it will attract the attention of
investors genuinely in need of the fund.

This study therefore makes the following recommendation:

First improvement in the declining market capitalization by encouraging more foreign

investors to participate in the market, maintain state of the art technology like automated
trading and settlement practice, electronic fund clearance and eliminate physical transfer of
shares. There is also need to restore confidence to the market by regulatory authorities
through ensuring transparency and fair trading transaction and dealing in the stock exchange.
It must also address the reported case of abuse and sharp practices by some companies in the
market. Lastly, to boost the value of transactions in the Nigerian capital market, there is need
for availability of more investment instruments such as derivatives, convertibles, future, and
swaps options in the market. Given the present political dispensation, all the tiers of
government should be encourage to fund their realistic developmental programme through
the capital market. This will served as a leeway to freeing the resources that may be used in
other sphere of the economy.

There is need for improvement in the declining market capitalization by encouraging more
foreign investors to participate in the market, maintain state of the art technology that will
ensure a free flow of information in the market to attract more investors as well as increase
new issues which will automatically increase the quantum of market capitalization. There is
also the need to restore confidence in the market by the Securities and Exchange Commission
and the Nigerian Stock Exchange through ensuring transparent and fair trading transactions
and dealings in the stock exchange. Government should remove impediments to market
growth in form of legal and regulatory barriers because they are sometimes disincentives to
investment.

As observed the total listed equities in the NSE are still very low compared to other stock
markets like those of South Africa and Egypt. Therefore, to increase the number of listed
companies there is need to ensure stable macroeconomic environment, to encourage foreign
multinational companies or their subsidiaries to be listed on the Nigerian stock exchange and
also to improve the trading system in order to increase the ease with which investors can
purchase and sell shares.

85
Furthermore, the government should invest more and develop the nation's infrastructure in
order to create an enabling environment for businesses to grow and for productivity and
efficiency to thrive which will bust economic activities.

Total new issues are very important to the growth of any capital market. Therefore,
government should employ appropriate trade policies such as establishing National
Association of Securities Dealers (NASD) that promote the inflow of international capital and
foreign investment, so as to enhance the production capacity of the nation. The Government
should restore the confidence of shareholders (investors) due to the declining fortune of the
stock market.

Finally, the volume of transaction needs to be boosted by NSE through introducing more
derivatives, convertibles, futures and options in the markets in order to meet up with other
markets of the world.

5.4 Limitations of the Study

The study covers a period of 2003 - 2022. Thus changes or reforms adopted in 2011 are not
covered by the findings of the study. This therefore serves as one of the limitations of the
study. Secondly, the study is limited to only the Nigerian Stock Market. It could have covered
other countries in the Sub-Saharan region by widening its scope.

Finally, several variables are used as proxies of capital market performance. This study
therefore, uses only four variables to measure capital market performance, more variables
may be useful to improve the results.

5.5 Areas for Further Study

Similar studies could be replicated to cover up to 2023 as the period of study so as to

incorporate new reforms instituted in the market that are not covered by the study. Also, other
studies could be conducted to consider other African countries in addition to Nigeria within
the Sub-Saharan African region. Such studies will therefore have a wider coverage and basis
for comparison.

Finally, other studies could similarly be conducted incorporating other variables other than
the ones used in this study.

86
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APPENDIX
Moshood Abiola Polytechnic, Abeokuta
School of Business and Management Studies
Department of Accountancy
Questionnaire

Dear Respondent,
I am student of the above mentioned institution currently undertaking a
research project on the study of “Capital Market Development and Nigeria Economy”; a
requirement for the award of Higher National Diploma in Accountancy of Moshood Abiola
Polytechnic, Abeokuta, Ogun State. All information provided will be held in strict
confidentiality and for the academic purpose only.

Thank you for your response to the questions.

Yours Sincerely,

M
18/01/0094

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SECTION A: PERSONAL INFORMATION

(Please tick as appropriate)

1. Sex: (a) Male () (b) Female ( )

2. Age: (a) Below 25 years () (b) 26-35 years ( ) (c) 36 – 45 years ( )

(d) 46-55 years ( ) (e) 56 years and above ( )

3. Educational Qualification

(a) M.Sc., MBA, MA, Ph.D ( )

(b) B.Sc/HND ( )

(c) NCE/OND/ “A” Level or its Equivalent ( )

(d) WASC/GCE ( )

4. Category of Staff

(a) Senior staff ( )

(b) Junior staff ( )

5. Work Experience

(a) 0-5 years ( )

(b) 6-10 years ( )

(c) 11-15 years ( )

(d) 16-20 years ( )

(e) 21-25 years ( )

94
SECTION B

Please assess the following statements

SA = Strongly Agree, A = Agree U = Undecided SD = Strongly Disagree D = Disagree

SA = 1 A=2 U=3 SD = 4 D=5

S/No Statement 1 2 3 4 5
1. Is there relationship between capital market and Nigerian
Economy
2. There is a relationship between capital market and Nigeria
economic
3. There is no relationship between capital market and
Nigeria economic
4 How do the deficiencies of the Nigerian stock exchange
affect the Nigerian economy
5. There are positive deficiencies of the Nigeria stock
exchange affect the Nigeria economy
6. There are no deficiencies of the Nigeria stock exchange
affect the Nigeria economy
7 How does the crisis in the Nigerian stock exchange affect
Nigerian Capital market
8. Crises in Nigeria stock exchange affect Nigeria capital
market
9. Crises in Nigeria stock exchange does not affect Nigeria
Capital market
10. There are challenges of the Nigeria stock exchange in
developing the capital market
11. There are no challenges of the Nigeria stock exchange in
developing the capital market
What are the roles of the capital market in developing
Nigerian economy?
12 There are roles of the capital market in developing Nigeria
economy
13 There are no roles of the capital market in developing

95
Nigeria economy

96