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This study was carried out to determine the effect of stock market on
capital formation in Nigeria. The variables included in the model were,
Gross Fixed Capital Formation, value of share traded, interest rate,
inflation rate, commercial bank investment indicator, and Stock Market
Capital. Data were sourced from CBN statistical bulletin (2011). The
study employed OLS technique to determine the effect of stock market on
capital formation. The empirical finding shows that stock market capital,
commercial bank investment indicator, inflation rate, interest rate, value
of share traded and Gross Fixed Capital Formation. Based on the
findings, the following recommendations were made. The total
liberalization of the financial sector and encouragement of Nigerians to
take advantage of the stock exchange.
Title Page – – – – – – – – – i
Approval Page – – – – – – – – ii
Dedication – – – – – – – – iii
Acknowledgment – – – – – – – iv
Abstract – – – – – – – – – v
Table of Contents – – – – – – – vi
1.0 INTRODUCTION – – – – – – 1
1.1 Background of the Study — – – – 1
1.2 Statement of the Problem – – – – – 5
1.3 Research Question – – – – – – 7
1.4 Research Objectives– – – – – – 8
1.5 Research Hypothesis- – – – – – 9
1.6 Significance of the Study – – – – – 9
2.0 LITERATURE REVIEW – – – – – 11
2.1 Theoretical Framework – – – – – 19
2.2 Empirical Literature – – – – – – 30
2.3 Limitations of the Previous Studies – – – 33
3.1 Model Specification – – – – – – 36
3.2 Estimation Procedure – – – – – 38
3.3 Evaluation Methods – – – – – – 39
3.3.1Economic A Priori Test – – – – – 39
3.3.2 Evaluation Based on Statistical Criteria – – 39
3.3.3 Evaluation Based on Econometric Criteria – 41
3.4 Sources of Data – – – – – – 43
4.1 Presentation of Result – – – – – 44
4.2 Analysis of the Result – – – – – 45
4.2.1Analysis of the Regression Coefficients – – 45
4.2.2Analysis of the Evaluation Methods – – – 46
8 Evaluation Based on Economic Criteria- – 46 Evaluation Based on Statistical Criteria- – 47 Evaluation Based on Econometric Criteria – 49
4.3 Evaluation of the Research Hypothesis – – 52
5.1 Summary – – – – – — – – 53
5.2 Recommendations – – – – – – 54
5.3 Conclusions – – – – – – – 55
BIBLIOGRAPHY – – – – – – 57
Almost all the economist laid emphasis on capital
formation as the major determinant of economic growth. The
meaning of capital formation is that society does not apply the
whole of it’s current productive activity to the needs and
immediate desire of consumption, but directs some part of it
to the creation of capital goods, tools and instruments,
machines and transport facilities, plants and equipments all
the various forms of real capital that can so greatly increase
the efficiency of productive effort. The essence of capital
formation is to divert a portion of society’s currently available
resources for the purpose of increasing the stock of capital
goods so as to make possible for an expansion of consumable
output in the future.
The research focuses it’s attention on Nigerian Stock
Exchange which as the most visible mirror of the formal
capital market in the country. The Nigerian Stock Exchange is
one of the institutions on the capital market, which specializes
in all forms of marketing trading securities. It is a network of
individual institution and instrument. The market plays a
central and dispensable role for which is has been variously
described as the “hall mark” or the heart of the capital market.
The rapid economic development of any economy
depends, among other things, on ready access of adequate
financial resources (Alile and Anao, 1990). The desire to
develop financial market in an economy is intimately
connected with the objective of accelerating industrial and
agricultural development. Among this financial market is the
stock exchange, which deals with the mobilization of bank
medium and long term capital funds (Sule and Momoh, 2009).
The mechanism of stock exchange came into existence to
enable investment, which were inherently illiquid to become
liquid through reconversion into cast at the decision of the
investor without inconveniency the company (Olowe, 1997).
Today, words like globalization have become familiar in
economic and finance parlance and past growing intern
dependence of economics and financial markets cannot be
The development of the capital market in Nigeria dates
back to 1946, when the first government securities was
floated; the institutional facilities for the operation was
however absent and did not commence until fifteen years later,
when the Nigerian Stock Exchange (now the Nigerian Stock
Exchange) was established in 1961.
Consequently, in 1953, the Federal Government set up a
committee under Professor R.H. Barback to advise on ways
and means to fostering a shares market in Nigeria. The report
of the committee was published in 1959 and it recommended
among other things:
(1) The creation of facilities for dealing in shares
(2) The establishment of rules regulating transfer and;
(3) Measures to encourage saving and issue of
government and other organizations.
As follow up to this report, the then Lagos Stock Exchange
now Nigerian Stock Exchange was incorporated on 15th
September, 1960 through the collective encouragement of the
business community, the Nigerian Industrial Development
Bank Limited (NIDB) and the Central Bank of Nigeria.
Conclusively, the availability of a secondary market
endangers capital formation and socio-economic development.
The allocative function as critical in determining the overall
growth of the economy ie, the financial sector. Therefore, the
role of the Nigerian Stock Exchange in the economy is an
engine for capital formation saddles with the private sector in
general to achieve economic development program.
The Nigerian Stock Exchange market is faced with
numerous problems which comprises of decreased trading
activities where by persistent rise in the demand for securities
without a corresponding increase in its supply. In this case,
investments are not easily found for purchase.
Given the number of years since the Nigerian Stock
Exchange has been established and the substantial financial
resources available in the country, coupled with the existing
institutions one can claim that the entire spectrum of the
capital market has not been sufficiently active, especially when
compared with the capital unit of similar or lesser aged units
in other developing countries. The factors responsible for this
could be identified to include:
(1) High Cost of transaction
(2) Lack of transparency and
(3) Poor economic performance etc.
The spinal effect of the global economic crisis on the
Nigerian Stock Exchange continued in 2009 with the
exorbitant lending rate mounting pressure on the stock
market as a result of massive borrowed fund in the market.
The rush by stock investors to liquidate their investment to
repay their loans in order to avoid the excessive lending rate
caused the Nigerian Stock Market to crash. (Sere Ejembi,
2008) noted that it is not the global financial crisis and the
speculative sub prime mortgage bubbles and bust alone that
is responsible for the crash of the stock market, other
contributory factors lent support. Some of these, namely;
margin lending by the deposit money banks (DMBs), stock
price appreciation that had no correlation with the
fundamentals in the quoting companies and local investors
opting to invest in foreign capital markets to take advantage of
the low stock price.
This study intends to evaluate the performance of the
Nigerian Stock Exchange interms of its trading activities and
determine the extent to which it’s contributes to the capital
formation process of the economy of at all there is causation
between them.
The study will examine the following questions,
1. How does the Nigerian Stock Exchange influence capital
formation in Nigeria?
2. What factors influence capital formation in the Nigerian
3. What is the role of Stock Exchange on capital formation
in Nigeria
This study is primarily aimed at examining critically, the
activities and performance of the Nigerian Stock Exchange
especially, the study aims to;
1. To determine the impact of the Nigerian Stock Exchange
on capital formation.
2. To evaluate the performance and growth of the Nigerian
Stock Exchange.
3. To determine how the exchange could stimulate
4. To quantify the relative importance of the Stock
Exchange in determining the capital formation for
national development.
The hypothesis that could be tested in this study is
stated below:
(1) H0
: The Nigerian Stock Exchange has no significant
impact on capital formation.
(2) H1
: The Nigerian Stock Exchange has significant impact
on capital formation.
The significant of this research is to examine the
usefulness of the Nigerian Stock Exchange as a vehicle for
capital market shows that Nigerian Stock Exchange
contributes positively to the national development because it
portrays the capabilities to raise funds from the surplus to the
deficit for investment purpose.
Therefore, the design of an optimal capital structure,
which ensures adequate and sustainable growth for national
development; this is the responsibility of the Nigerian Stock
Exchange. The beneficiaries of this research work are the
government, industries and individuals would benefit from the
capital market role on capital formation.


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