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This study attempts to investigate the Role of the Stock
Market in the Growth of the Nigerian Economy spanning
through 1980 – 2010. The broad objective of this work is to
ascertain the role of the stock market in output growth in
Nigeria using Market Capitalization as a proxy for the stock
market taking cognizance of some intervening variables.
This was evaluated using OLS Method. It was observed that
market capitalization has a significant impact on economic
growth as well as the latter Granger Causing the former.
There are also other variables that are modeled alongside
market capitalization that affect the output of Nigeria. The
policy recommendation in this work centres on deliberate
attempts by the government and every agent responsible for
the existence of the market either as a player or an umpire
to be up and doing especially the government. The work is
organized into five chapters, time series data were used with
three regressors: market capitalization, domestic savings and
value of traded stocks.
Title Page———————————————-i
Table of Content ————————————-vi
1.1 Background of the Study —————————1
1.2 Statement of the Problem—————————4
1.3 Research Question———————————–5
1.4 Objectives of the Study——————————5
1.5 Hypothesis of the Study—————————–6
1.6 Significance of the Study—————————-6
1.7 Scope of the Study———————————–7
2.0 LITERATURE REVIEW—————————-8
2.1 Theoretical Literature ——————————-8
2.2 Empirical Literature———————————23
3.1 Model Specification——————————–39
3.1.1 Functional Form Specification———————39
3.1.2 Econometric Specification————————-40
3.2 Estimation Procedure——————————41
3.2.1 Economic Test———————————–42
3.2.2 Econometric Test——————————–42
3.2.3 Diagnostic Test———————————-45
3.3 Sources of Data———————————47
4.1 Presentation of Regression Result—————–48
4.2 Evaluation of Result——————————–50
4.3 Econometric Test———————————–51
4.4 Econometric Criteria(Second Order Test)———54
4.5 Interpretation of Result—————————-58
4.6 Policy implication of Findings———————-59
5.1 Summary of findings——————————–61
5.2 Recommendations———————————-62
5.3 Conclusions——————————————64
1.1 Background of the Study
Stock Market is viewed as a medium to encourage
savings, help channel savings into productive
investment, and improve the efficient and productivity of
investment. The emphasis on the growth of stock
markets for domestics‘ resource mobilization has also
been strengthened by the need to attract foreign capital
in non-debt creating forms. A viable equity market can
serve to make the financial system more competitive
and efficient. Without equity markets, companies have
to rely on internal finance through retained earnings.
Large and well established enterprises are in a privileged
position because they can make investment from
retained earnings and bank borrowings, while new
companies do not have easy access to finance. Without
being subjected to the scrutiny of the stock market, big
firms get bigger, and for the emerging smaller
companies, retained earnings and fresh cash injections
from the controlling shareholders may not be able to
keep pace with the needs for more equity financing
which only an organized market place could provide.
The corporate sector would also be strengthened by the
requirements of equity markets for the development of
widely acceptable accounting standards, disclosure of
regular, adequate, and reliable information. While
closely held companies can camouflage poor investment
decisions and low profitability, at least for a while, public
held companies cannot afford this luxury. The
availability of reliable information would help investors
make compares‘ of the performance and long term
prospects of companies; corporations to make better
investment and strategic decisions; and provide better
statistics for economic policy makers.
Success in capital accumulation and mobilization for
development varies among nations, but it is largely
dependent on domestic savings and inflows of foreign
capital. Therefore, to arrest the menace of the current
economic downturn, effort must be geared towards
effective resource mobilization. It is in realization of this
that consideration is given to measure the development
of capital market as an institution for the mobilization of
finance from the surplus sectors to the deficit sectors.
Levine (1991) showed a positive relation between
financial stock market and economic growth by issuing
new financial resources to the firms. The financial stock
market facilitates higher investments and the allocation
of capital, and indirectly the economic growth.
Sometimes investors avoid investing directly to the
companies because they cannot easily withdraw their
money whenever they want. But through the financial
stock market, they can buy and sell stocks quickly with
more independence. An efficient stock market
contributes to attract more investment by financing
productive projects that lead to economic growth,
mobilize domestic savings, allocate capital efficiently,
reduce risk by diversifying, and facilitate exchange of
goods and services (Mishkin 2001; and Caporale et al,
1.2 Statement of the Problem
There is abundant evidence that most Nigerian
businesses lack medium and long –term capital. The
business sector has depended mainly on short-term
financing such as overdrafts to finance even long-term
investment. Based on the maturity matching concept,
such financing is risky. All such firms need to raise an
appropriate mix of short- and long-term capital
(Demirguc-Kunt and Levine 1996). Most recent
literatures on the Nigeria Capital Market have recognized
the tremendous performance the market has recoded in
recent times. However, the vital role of the capital
market in economic growth and development has not
been empirically investigated thereby creating a
research gap in this area. This study is undertaken to
examine the contribution of the capital market in the
Nigerian economic growth and development. Aside the
social and institutional factors inhibiting the process of
economic development in Nigeria, the bottleneck created
by the deficiency of finance to the economy constitutes a
major setback to its development. As a result, it is
necessary to evaluate the Nigerian capital market.
1.3 Research Questions
In the light of the research problems, this study
attempts to answer the following:
1. Does stock market have a significant effect on
economic growth?
2. Does investment have a significant effect on
3. What is the causality between stock market and
economic growth?
1.4 Objectives of the Study
The broad objective of this study is to examine the role
that the stock market plays in the growth process of the
Nigerian economy.
However, the specific objectives are as follow:
1. To determine the nature of relationship between
stock market and economic growth.
2. To examine the determinants of investment in
the stock market.
3. To determine the causality between stock market
and economic growth.
1.5 Hypotheses of the Study
1. Ho: That the capital market has a negative
relationship with economic growth.
2. Ho: portfolio Investment in Nigeria is not a
determinant of economic growth.
3. Ho: There is no causal relationship between stock
market and economic growths.
1.6 Significance of the Study
The study will explore the effectiveness of capital
market instruments on Nigerian economic growth.
Though the scope of study will be limited to the capital
market, it is hoped that the exploration of this market
will provide a broad view of the operations of the capital
market. It will contribute to existing literature on the
subject matter by investigating empirically the role,
which the capital market plays in the economic growth
and development of the country. The main importance
of this study is that it will provide policy
recommendations to policy – makers on ways to improve
operations and activities of the capital market.
1.7 Scope of the Study
The economy is a large component with lot of
diverse and sometimes complex parts; this research
work will only look at a particular part of the economy
(the financial sector). This work will not cover all the
facts that make up the financial sector, but shall focus
only on the capital market and it role as it impacts on
the Nigerian economic growth. The empirical
investigation of the role of the capital market on the
economic growth in Nigeria shall be restricted to the
period between 1980 and 2010 a period of thirty (30)


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