An Empirical Analysis of the Impact of the Nigerian Capital Market on Her Socio-economic Development

The objective of this study was to empirically analyze the impact of the Nigerian capital market on her socio-economic development from 1981 to 2008. The socio-economic development was proxy by the gross domestic product (GDP) while the capital market variables considered included market capitalization, total new issues, volume of transaction and total listed equities and Government stock. Using the ordinary least square it was found that the capital market indices have not impact significantly on the GDP. The government is therefore advised to put up measures to stem up investors’ confidence and activities in the market so that it could contribute significantly to the Nigerian socio-economic development. allocates these funds to projects of best returns to fund owners. This allocative function is critical in determining the overall growth of the economy.The functioning of the capital market affects liquidity, acquisition of information about firms, risk diversification, savings mobilization and corporate control (Anyanwu 1998). Therefore, by altering the quality of these services, the functioning of stock markets can alter the rate of economic growth (Equakun 2005). OkerekeOnyiuke (2000) posits that the cheap source of funds from the capital market remain a critical element in the sustainable development of the economy. She enumerated the advantages of capital market financing to include no short repayment period as funds are held for medium and long term period or in perpetuity, funds to state and local government without pressures and ample time to repay loans. In 1986 Nigeria embraced the International Monetary Fund (IMF)-World Bank Structural Adjustment Programme (SAP) which influenced the economic policies of the Nigerian government and led to reforms in the late 1980s and early 1990s.The programme was proposed as an economic package to rapidly and effectively transformed the Nigerian economy within two years (Yesufu 1996). However, until SAP was abandoned in 1994, the objectives were not achieved due to the inability of government to judiciously implement some of its policy measures (Oyefusi and Mogbolu 2003). The notable reforms include monetary and fiscal policies, sectoral reforms such as removal of oil subsidy in 1988 to the tune of 80%,interest deregulation from August 1987, financial market reform and public sector 136 PAT DONWA AND JAMES ODIA reforms which entails the full or partial privatization and commercialization of about 111 public owned enterprises. The Nigerian Stock Exchange was to play a key role during the offer for sale of the shares of the affected enterprises (World bank 1994;Anyanwu 1993; Anyanwu et al. 1997; Oyefusi and Mogbolu 2003).The introduction of SAP in Nigeria has resulted in a very significant growth of the country’s stock market as a result of deregulation of the financial sector and the privatization exercise which exposed investors and companies to the significance of the stock market (Alile1996;Soyode 1990). Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market yet its impact at the macroeconomy was negligible. Again the capital market was instrumental to the initial 25 banks that were able to meet the minimum capital requirement of N25billion during the banking sector consolidation in 2005.The stock market has helped government and corporate entities to raise longterm capital for financing new projects ,and expanding and modernizing industrial / commercial concerns (Nwankwo 1991) . Given the roles the capital market has played during the privatization of public owned enterprises, recent recapitalization of the banking sector and avenue of long term funds to various government and corporations in Nigeria. The objective of this paper is to find out whether the Nigerian capital market has made significant impact on the socio-economic development of Nigeria between 1981 and 2008.The rest of the paper is divided into the five sections. The next section is the review of literature and theoretical framework. Section three deals on the method employed by the study. Section four is the discussion and conclusion. The conclusion and recommendation is in section five while the last section in the summary. 2. LITERATURE REVIEW AND THEORETICAL FRAMEWORK There have been the growing concerns and controversies on the role of the Stock markets on economic growth and development (Oyejide 1994; Levine and Zervos 1996;Demirgue-kunt and Levine 1996;Nyong 1997;Obadan 1998; Sule and Momoh 2009; Ewah,Esang and Bassey 2009).There have been mixed results; while some are in support of a positive link, some negative link and others do not find any empirical evidence to support such conclusion. For instance, 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. Levine and Zervos (1996) examined whether there was a strong empirical relationship between stock market development and long-run economic growth. They found a strong correlation between overall stock market development and long-run economic growth. Demiurgic-Kunt and Levine (1996) using data from 44 countries for the period 1986 to 1993 found that different measures of stock exchange size are strongly correlated to other indicators of activity levels of financial, banking, non-banking institutions as well as to insurance companies and pension funds. They concluded that countries with well-developed stock markets tend to also have well-developed financial intermediaries. Again, Demiurgic-Kunt and Maksimovic (1998) have shown and re-emphasized the complementary role of the stock market and banks that they were not rival or alternative institutions using 30 countries from 1980 to 1991. Levine and Zervos (1998) used pooled cross-country time series regression of 47 countries from 1976 to 1993 to evaluate whether stock market liquidity is related to growth, capital accumulation and productivity. They towed the line of DemiurgicKunt and Levine (1996) by conglomerating measures such as stock market size, liquidity and integration with world market, into index of stock market development. The rate of Gross Domestic Product (GDP) per capita was regressed on a variety of variables designed to control for initial conditions, political instability, investment in human capital and macro economic condition and then, included the conglomerated index of stock market development. They found empirically that the measures of stock market liquidity were strongly related to growth, capital accumulation and productivity while stock market size does not seems to correlate to economic growth. 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 employed a time series data from 1970 to 1994. Four measures of capital market development-ratio of market capitalization to GDP (in %), ratio of total value of 137 AN EMPIRICAL ANALYSIS OF THE IMPACT OF THE NIGERIAN CAPITAL MARKET transactions on the main stock exchange to GDP (in %), the value of equities transactions relative to GDP and listing were used. The four measures were combined into one overall composite index of capital market development using principal component analysis. The financial market depth was included as control. It was found that the capital market development is negatively and significantly correlated with the long-run growth in Nigeria. Demiurgic-Kunt and Maksimovic (1998) cited in Henry (2000) found a relationship between economic growth and the stock market activity in the field of transmission of security (secondary market) more than in funds channeling (primary market). Barlett (2000) demonstrated that a rising stock price raises the wealth of the economy (wealth effect ) by encouraging increase in consumers consumption and increase in investment. Ewan et al. (2009) appraise the impact of the capital market efficiency on the economic growth of Nigeria using time series data from 1961 to 2004.They found that the capital market in Nigeria has the potential of growth inducing but it has not contributed meaningfully to the economic growth of Nigeria because of low market capitalization, low absorptive capitalization, illiquidity, misappropriation of funds among others. Harris (1997) did not find hard evidence that stock market activity affects the level