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MKT00308 - THE IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH


CHAPTER ONE  

 

INTRODUCTION

  • Background to the Study

The mobilization of resources for national development has long been the crucial focus of development economists.  This is because, for sustainable growth and development to take place, funds must be effectively mobilized and allocated to enable business and the economy harnesses their human, material and managerial resources for optimal output.  It is against this background that every country has a financial system which serves as a mechanism for the mobilization of resources for the attainment of economic growth. Consequently, the more developed the financial system of an economy is, the more efficient it is likely to be in the mobilization and allocation of resources for development purposes.

The financial system of any society is the framework within which capital formation takes place. According to Odife (1994), it is the framework within which the savings of some members of the society are made available to other members of the society. Put differently, it is the arrangement or mechanism by which the savings surplus units of the economy transfer their resources to the borrowing deficit units for the purpose of enhancing economic growth (Okereke – Onyiuke, 2009).  The financial system is made up of two major markets.  These are the money market and the capital market.  According to Elakama (2009), the two markets are at the heart of the financial system.

The money market is a type of market where short term funds and securities such as treasury bills, inter-bank deposits, Banker’s acceptance, certificate of deposits etc whose tenor are usually shorter than or equal to a year are bought and sold.  In other words, it is a market where short term capital is sourced.  The capital market on the other hand is a type of market where long term debt instruments whose tenor exceeds a year are traded.  According to Sulaiman (1999), it is a network of interrelated institutions governed by operational guidelines, which permit the sale of equity and long term debt within the broad classification of the capital market is the stock market, which operates as the rallying point for the overall activities in the capital market.  According to Alile and Anao (1984), the stock market is the pivot around which every activity in the capital market revolves.  Its follows therefore that without the facilities provided by the stock market, it is doubtful if the capital market can efficiently perform its expected role of resource mobilization (Ologunde, Elumilade and Asaolu, 2006).  It is in the light of the above that the stock market is considered a vital element in the mobilization and allocation of resources in any modern economy.

Until now, the literature has mainly focus on the role of financial intermediation in the process of economic growth and capital accumulation.  Indeed, many studies have analyzed the channels through which banks and other financial intermediaries may help to increase, for example, the savings rate or the average productivity of capital and, in turn growth.  Recently, however, with the upsurge in world stock markets and with a large proportion of this boom accounted for by emerging markets, there has been a growing interest among economists and policy makers on the role played by stock market development in the process of economic development.  Recent research has therefore begun to focus on the linkage between the stock market and economic development.  It is no wonder, that the World Bank Economic Review dedicated its May 1996 issue to the role of the stock market in economic growth.

The stock market also known as the stock exchange or equity market performs some functions that promote the growth of the economy (Osinubi, 2004).  Firstly, as an economic institution, the stock market promotes efficiency in capital formation and allocation.  Secondly, the stock market serves as a veritable tool in the mobilization and allocation of savings among competing uses which are critical to growth of the economy.  Thirdly it enables governments and industry to raise long term fund for financing new projects and expanding and modernizing industrial/commercial concerns, thereby increasing the quantity and quality of investment.  Fourthly, by performing its function of allocating capital efficiently, the stock market, as it mobilize savings concurrently allocates a larger proportion of it to the firms with relatively high prospects as indicated by their rate of returns and level of risk.  The importance of this function is that capital resources are channeled by the mechanism of the forces of demand and supply to those firms with relatively high and increasing productivity, thus enhancing economic expansion and growth.  Additionally, the stock market performs the functions of intermediating between the needs of firms and investors; providing a means of sharing investment risks; providing information about companies, promoting and providing the means of improving corporate governance etc.  Furthermore, well functioning stock market provides low cost equity capital for firms imposes control on the investment behavior of firms through continuous adjustment of shares and serves as a mechanism for attracting foreign portfolio investment.  Given the above functions, it is expected that the development of the stock market will both enhance and lead to growth of the economy.

 

 

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  • Statement of the Problem

The role of a developed stock market in the development of any economy cannot be over emphasized in view of its potentials and likely impact on the economy if well harnessed.  It is a known fact that nations cannot develop without the needed long term funds for development projects, and the more developed a stock market is, the higher the potential for sourcing long term fund for industrialization. Indeed, as pointed out by Osinubi, a well functioning stock market serves a veritable tool in the mobilization and allocation of resources needed to meet the rapid expansion of the economy as it develops.

            Over the years, the Nigerian Stock market has experienced relative stability and recorded impressive growth. This growth has been most significant especially since the introduction of the Structural Adjustment Programme (SAP) in the early 1980s, which brought about the privatization, commercialization and liberalization programmes, all of which has helped in boosting activities in the stock market.  However, as noted by Ogwumike and Omole (1997), when compared with other emerging and developed markets, it becomes evident that the Nigerian Stock Market is still relatively small in size and underdeveloped.  For example, a comparison of the Nigerian Stock Market in terms of number of listed equities reveals that while Nigeria has only 214 equities listed in 2005, even though its stock exchange was established in 1960, Singapore has over 500 (established in 1979), Hong Kong 695 (established in 1986) and Istanbul over 900 (established in 1986).  This thus indicates the relative poor performance of the Nigerian Stock Market vis-à-vis those of other countries.  Moreover, Osazee (2007) pointed out that less than 21 percent of the 400,000 registered companies in Nigeria are not currently quoted on the Nigerian Stock Exchange, a situation which he attributes to the unattractiveness of the market as well as the lack of incentives for more companies to go public.  Furthermore, while the growth of the stock market has been impressive, same cannot be said of the growth of the Nigerian economy.

 

1.3          Research Questions

  1. Has the growth of the Nigerian Stock Market promote economic growth in Nigeria?
  2. Has the market acted as a mechanism for attracting foreign capital inflow?
  • How has the market facilitate the mobilization of long term fund for financing long term development project?

 

  • Objectives of the Study

      The main objective is that they promote the growth and development of the economy

           Other specific objectives are:

  1. To examine the influence of stock market on economic growth;
  2. To analyze the performance of Nigerian Stock Market;
  • To analyze the performance/growth drivers of the Nigerian stock market;
  1. To evaluate the challenges facing the Nigerian Stock market and examine various ways of boosting its performance and growth.

 

1.5          Hypothesis of the Study

           In order to validate data analysis, the following hypothesis were tested

            Ho:      The development of the Nigerian Stock Exchange is not positively associated with economic growth in Nigeria.

            H1:      The development of the Nigerian Stock Exchange is positively associated with economic growth in Nigeria

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