Impact of capital market on Nigerian economy, 1981 - 2014

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This study examined the impact of the capital market on Nigerian economy. Time series data were collected on Real Gross Domestic Product, Market Capitalization, All Share Index and Turnover Ratio from 1981 - 2014.

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International Journal of Management (IJM) Volume 8, Issue 3, May–June 2017, pp.134–142, Article ID: IJM_08_03_014 Available online at http://www.iaeme.com/ijm/issues.asp?JType=IJM&VType=8&IType=3 Journal Impact Factor (2016): 8.1920 (Calculated by GISI) www.jifactor.com ISSN Print: 0976-6502 and ISSN Online: 0976-6510 © IAEME Publication IMPACT OF CAPITAL MARKET ON NIGERIAN ECONOMY, 1981 - 2014 Ugwuanyi, Charles Uche (Ph.D) Department Of Economics, Michael Okpara University Of Agriculture, Umudike, Abia State, Nigeria ABSTRACT This study examined the impact of the capital market on Nigerian economy. Time series data were collected on Real Gross Domestic Product, Market Capitalization, All Share Index and Turnover Ratio from 1981 - 2014. The study employed Unit root, Cointegration and Granger Causality Tests as well as Ordinary Least Square method in the empirical analysis. The unit root tests show that the variables were not stationary at level but all became stationary at first difference. They were said to be integrated of the order one, 1(1) at first difference. The Cointegration Test revealed that all the variables were cointegrated, showing a long-run equilibrium relationship between capital market and Nigerian economy. The Granger Causality Test shows a unidirectional causality between the variables in the model. The OLS result indicates that the coefficient of determination, i.e. the R-squared has a value of 0.988849. This implies that 98 percent changes in the Real Gross Domestic Product of Nigeria could be attributed to the independent variables. The MCAP & TURNR have coefficient values of 0.899656 and 0.375083 with t-statistic of 14.60231 and 2.879237 respectively. The All Share Index (ASHI) has negative coefficient value of -0.265177 and t-statistic value of -5.667988. The implication of these findings is that the capital market in Nigeria appears not to be contributing enough to the economy as ASHI seen in economic literature as a better stock market indicator than MCAP and TURNR has negative impact on the economy. The findings support the Efficient Market Hypothesis. The study recommend improved information on past performances of companies, equity returns, equity prices, and stock/company listing to avoid unreasonable speculation by investors in financial assets. It will improve the performance of capital market in Nigeria. Key words: Capital Market, Nigerian Economy, Efficient Market Hypothesis, Equity returns, financial assets. Cite this Article: Ugwuanyi, Charles Uche (Ph.D), Impact of Capital Market on Nigerian Economy, 1981-2014. International Journal of Management, 8 (3), 2017, pp. 134–142. http://www.iaeme.com/IJM/issues.asp?JType=IJM&VType=8&IType=3 http://www.iaeme.com/IJM/index.asp 134 editor@iaeme.com
Impact of Capital Market on Nigerian Economy, 1981-2014 1. INTRODUCTION The perception of the economic policy in Nigeria and elsewhere is that the capital market is a driver or lubricant that keeps turning the wheel of the economy to growth and development because of its imperative functions of not just mobilizing long term funds and channeling them to productive investment but also efficiently allocating these funds to projects that make best returns to fund owners [1], [2], [3], [4], and [5]. Today, the activities and performance of capital market in Nigeria have much wider implications and these arise partly because of the growing influence of ideas and structure associated with the concept of democracy. The capital market has been identified as an institution that contributes to the socio-economic growth and development of emerging and developed economies. These are made possible through some of the vital roles it plays, such as channeling resources, promoting reforms to modernize the financial sector, financial intermediation capacity to link deficit to the surplus sector of the economy and as a veritable tool in the mobilization and allocation of savings among competitive uses which are critical to the growth and efficiency of the economy [6]. [7], argues that a nation requires a lot of local and foreign investments to attain sustainable economic growth and development. [8], states that capital market contributes to economic growth through the specific services it performs either directly or indirectly, notable among these functions are: mobilization of savings, creation of liquidity, risk diversification, improved dissemination and acquisition of information and enhanced incentive for corporate control. However, the paucity of long-term capital has posed the greatest predicament to economic growth and development in Nigeria. Therefore, using the cointegration test, Granger causality test and Ordinary Least Square analysis we studied the interaction of capital market variables in increasing economic growth in Nigeria. This is very important because share index and other variables determine the investors’ response in capital market. The purpose of this article is to identify the long-run effect of All Share Index, Market Capitalization and Turnover ratio on Nigerian economy. The article is organized as follows: Section one introduces the study while section two reviews the related literatures. Section three highlights the methodology employed in the study and the sources of data. Section four presents and discusses the empirical results. Lastly, section five provides the conclusions and policy implications. 2. LITERATURE REVIEW The Nigerian economy has over the years been subjected to series of social, political and economic policies and reforms. The policy and reform journeys saw the need to encourage private capital in development, and established Nigerian Stock Exchange (NSE) in 1961. However, 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 Exchange in December 1977 as a result of the review of the Nigerian Financial System [9]. The Securities and Exchange Commission (SEC) was established in 1979 through the SEC Act 1979, to regulate the capital market, but commenced actual operation in 1980. Since then, various forms of financial instruments have been issued in the capital market by new and existing businesses to finance product development, new projects or general business expansion. The capital market is divided into the primary and the secondary market. The primary market or the new issues market provides the avenue through which government and corporate bodies raise fresh funds through the issuance of securities which is subscribed to by the public or selected group of investors. The secondary market provides an avenue for sale and purchase of existing securities. http://www.iaeme.com/IJM/index.asp 135 editor@iaeme.com
Ugwuanyi, Charles Uche (Ph.D) [10], found that the secondary market activities have impacted more on Nigeria per capita income by tending to grow stock market earnings through wealth than the primary market. Many studies have been carried out on capital market and economic growth in Nigeria. These studies have produced differing findings and conclusions. Study by [11], found that the total value of stock has a negative effect on GDP growth rate. According to [12], the capital market in Nigeria has the potentials of growth inducing but it has not contributed meaningfully to the economic growth of Nigeria. Another study by [13] found that the capital market has an insignificant impact on the Nigerian economy. In contrast to the above findings, studies by [14], [15], [16], [17], [18], [19], [20], [21] and [22] conclude that positive relationship exists between capital market and economic growth in Nigeria. All these studies adopted basically the same methods of OLS and ECM, and variables such as total value of stock, all share index, market capitalization, GDP, money supply, interest rate e.t.c., but for different time frames. In view of the above controversy in empirical outcomes, theoretically, this study is anchored on Efficient Market Hypothesis developed by [23]. According to the Efficient Market Hypothesis (EMH), financial markets are efficient or prices are efficient 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. The hypothesis posits that past information is useful in improving the predictive accuracy of equity returns and equity prices tend to exhibit long memory or long range dependence on equity returns. In a country, where the market is highly and unreasonably speculative, investors will be discouraged from parting with their funds for fear of incurring financial losses. In such situation, it has detrimental effect on economic growth of the country, meaning investors will refuse to invest in financial assets. The implication is that companies cannot raise additional capital for expansion. This suggests that efficiency of the capital market is a necessary condition for economic growth 3. ECONOMETRIC METHODOLOGY 3.1. Model Specification This paper uses Ordinary Least Squares technique, cointegration and Granger causality tests to identify the relationship between capital market and economic growth of Nigeria. The Ordinary Least Squares (OLS) provides satisfactory results for estimates of structural parameters. It also involves decision on whether the parameters are statistically significant and theoretically meaningful. The capital market - economic growth hypothesis was tested according to four macroeconomic variables which were built upon the following augmented function: RGDP = f (ASHI, TURNR, MCAP) (1) Where: RGDP = Real Gross Domestic Product (as proxy for economic growth) ASHI = All Share Index TURNR = Turnover Ratio MCAP = Market Capitalization In a more explicit and econometric form, equation (1) can be stated as RGDPt=α0 + α1 ASHIt + α2TURNRt + α3MCAPt + et (2) Where http://www.iaeme.com/IJM/index.asp 136 editor@iaeme.com
Impact of Capital Market on Nigerian Economy, 1981-2014 α0 is the constant term α1- α3 = coefficients of each of the variable t = is the time trend and et is the stochastic random term By log linearising, the model becomes; log (RGDPt) = α0 + α1 log (ASHIt) + α2 log (TURNRt) + α3 log (MCAPt) + et (3) where: log = Natural log. 3.2. Description of Data and Sources We used annual data for the period 1981-2014. The annual variables were – Real Gross Domestic Product (RGDP), Turnover Ratio (TURNR), All Share Index (ASHI) and Market Capitalization (MCAP). Data were sourced from Securities and Exchange Commission Annual Reports and Accounts (various years), Central Bank of Nigeria (CBN) Statistical Bulletin (2014), National Bureau of Statistics Annual Reports for the various years.\ 3.3. Estimation Technique The study employed a four step procedure in order to determine the impact, long run and causality relationships between capital market and economic growth. First, the Augmented Dickey-Fuller (ADF) test was used to check whether each data series is integrated and has a unit root. Secondly, the results of the integration tests were then pursued by co-integration tests. The existence of long run equilibrium (stationary) relationships among economic variables is referred to in the literature as cointegration. The Johansen procedure was employed to examine the question of cointegration. It provided not only an estimation methodology but also explicit procedures for testing for the number of cointegrating vectors as well as for restrictions suggested by economic theory in a multivariate setting. Thirdly, Pair-wise Granger Causality Test was conducted to determine whether the current and lagged values of one variable affect another. An implication of Granger representation theories is that if two variables, say Xt and Yt are cointegrated and each is individually 1(1), then either Xt must Granger-cause Yt or Yt must Granger-cause Xt. Lastly, the OLS was employed to provide the estimates of the structural parameters used to verify the validity of the estimates and to determine whether they actually represent economic theory. 4. EMPIRICAL RESULTS 4.1. Unit Root Test We tested whether the relevant variables in equation (3) are stationary and to determine their order of integration. The results of the ADF test were provided in table 1 and 2. Table 1 Unit Root Test for Stationarity at Levels, (Intercept and Trend) Variables ADF Test 5% Critical Order of Interpretation Remarks LRGDP -2.128327 -3.552973 - Not Stationary LASHI -2.368928 -3.557759 - Not Stationary LTURNR -2.288621 -3.557759 - Not Stationary LMCAP -2.437887 -3.557759 - Not Stationary Note: Mackinnon (1991) critical value for rejection of hypothesis of unit root applied. Source: Author’s estimation using Eviews 7.0. http://www.iaeme.com/IJM/index.asp 137 editor@iaeme.com
Ugwuanyi, Charles Uche (Ph.D) The result in table 1 shows that all the variables were not stationary at levels. This can be seen by comparing the observed values (in absolute terms) of ADF test statistic with the critical values (also in absolute terms) of the test statistic at the 5% level of significance. The results in table 1 provide strong evidence of non stationarity. Therefore, the null hypothesis is accepted and it is sufficient to conclude that there is a presence of unit root in the variables at levels. Table 2 Unit Root Test for Stationarity at First Difference (Intercept and Trend) Variables ADF Test 5% Critical Order of Interpretation Remarks LRGDP -5.279981 -3.557759 1(1) Stationary LASHI -5.463069 -3.557759 1(1) Stationary LTURNR -5.177698 -3.557759 1(1) Stationary LMCAP -4.345574 -3.557759 1(1) Stationary Note: Mackinnon (1991) critical value for rejection of hypothesis of unit root applied. Source: Author’s estimation using Eviews 7.0. The result in table 2 reveals that all the variables became stationary at first difference. On the basis of this, the null hypothesis of non-stationarity is rejected and it is concluded that the variables are stationary. This implies that all the variables are integrated of order one, i.e. 1(1). 4.2. Cointegration Test Result Having confirmed the stationarity of the variables at 1(1), we proceeded to examine the presence of cointegration among the variables. When cointegration relationships exist it means that capital market and economic growth share a common trend and long-run equilibrium as suggested theoretically. We employed the Johansen and Juselius multivariate cointegration test. The model with lag I was chosen with the linear deterministic test assumption and the result is presented in table 3. Table 3 Unrestricted Cointegration Rank Test (Trace) Hypothesized No. of Eigen Value Trace Statistic 0.05 Critical Prob** CE(S) Value None* 0.767324 114.6181 47.85613 0.0000 At most 1* 0.686026 67.95856 29.79707 0.0000 At most 2* 0.537465 30.88833 15.49471 0.0001 At most 3* 0.176530 6.215291 3.841466 0.0127 Note: Trace test indicates 4 cointegrating eqn (s) at the 0.05 level *denotes rejection of the hypothesis at the 0.05 level **Mackinnon-Haug-Michelis (1999) ρ -values Source: Author’s estimation using Eviews 7.0 Table 4 Unrestricted Cointegration Rank Test (Maximum Eigen Value) Hypothesized No. of Eigen Value Max-Eigen 0.05 Critical Value Prob** CE(S) Statistic None* 0.767324 46.65950 27.58434 0.0001 At most 1* 0.686026 37.07023 21.13162 0.0001 At most 2* 0.537465 24.67304 14.26460 0.0008 At most 3* 0.176530 6.215291 3.841466 0.0127 Note: Max-Eigen value test indicates 4 cointegrating eqn (s) at the 0.05 level *denotes rejection of the hypothesis at the 0.05 level http://www.iaeme.com/IJM/index.asp 138 editor@iaeme.com
Impact of Capital Market on Nigerian Economy, 1981-2014 **Mackinnon-Haug-Michelis (1999) ρ -values Source: Author’s estimation using Eviews 7.0 The results of the cointegration test presented in tables 3 and 4 indicate four (4) cointegrating equations at 0.05 significant levels in both Trace and Max-Eigen value tests. Cointegration is said to exist if the values of computed Eigen values are significantly different from zero or if the Trace statistic or Max-Eigen statistic is greater than the critical value at 5 percent level of significance. From tables 4.2.1 and 4.2.2, four of the hypothesized equations satisfy this condition and therefore the null hypothesis of no cointegration among the variables is rejected in the four equations. There is therefore a long-run relationship between the variables. 4.3. Granger Causality Test Result Table 5 Pair-wise Granger Causality Tests (Lags. 2) Null Hypothesis Obs. F-Statistic Prob. MCAP does not Granger cause RGDP 32 2.28255 0.1214 RGDP does not Granger cause MCAP 6.42200 0.0052 ASHI does not Granger cause RGDP 32 0.76151 0.4767 RGDP does not Granger cause ASHI 2.66232 0.0880 TURNR does not Granger cause RGDP 32 22.6640 2.E-06 RGDP does not Granger cause TURNR 4.16921 0.0264 ASHI does not Granger cause MCAP 32 2.25730 0.1240 MCAP does not Granger cause ASHI 1.35755 0.2743 TURNR does not Granger cause MCAP 32 2.85806 0.0748 MCAP does not Granger cause TURNR 11.0974 0.0003 TURNR does not Granger cause ASHI 32 7.90616 0.0020 ASHI does not Granger cause TURNR 25.2978 6.E-07 Source: Author’s estimation using Eviews 7.0 The table 5 above presents the Pair-wise Granger causality tests. It could be seen from the table that there is a unidirectional relationship between Real Gross Domestic Product (RGDP) and Market Capitalization (MCAP), causality runs from RGDP to MCAP, given that the F- statistic is greater than 2.0 rule of thumb and its probability value of 0.0052 is less than 0.05. It could also be seen from the table that causality runs from MCAP → TURNR and TURNR → ASHI but not otherwise. 4.4. Ordinary Least Squares (OLS) Estimate Table 6 OLS Result Variable Coefficient Std. Error t-statistic Prob. C 4.987124 0.245855 20.28485 0.0000 LMCAP 0.899656 0.061611 14.60231 0.0000 LASHI -0.265177 0.046785 -5.667988 0.0000 LTURNR 0.375083 0.130272 2.879237 0.0073 R-squared 0.988849 Adjusted R-squared 0.987734 F-statistic 66.7741 Prob (F-statistic) 0.000000 Durbin-Watson Stat 1.768286 Source: Author’s estimation using Evies 7.0 http://www.iaeme.com/IJM/index.asp 139 editor@iaeme.com
Ugwuanyi, Charles Uche (Ph.D) The table 6 presents the Ordinary Least Square (OLS) estimate. The OLS result shows that Market Capitalization (MCAP) and Turnover Ratio (TURNR) were positively related to Real Gross Domestic Product (RGDP) while All Share Index (ASHI) was found to be negatively related to RGDP. All the independent variables were statistically significant at 5% level of significance. The LMCAP, LASHI and LTURNR have t-statistic values of 14.60231, -5667988 and 2.879237 respectively. This is also confirmed from their ρ -values of 0.0000, 0.0000 and 0.0073 that are less than 0.05. Also, the overall level of significance shows that the entire influence on RGDP is statistically significant given the probability value of the F- statistic value of 0.000000 being less than 0.05. Equally, the Durbin-Watson statistic (DW) has a value of 1.768286 at 5% level of significance (with three explanatory variables and 34 observations) that is greater than DW tabulated for dl and du with 1.36 and 1.65 respectively. This shows that there is no auto correlation. The absence of auto correlation makes the estimate unbiased, consistent and reliable. The coefficient of determination i.e. R-squared has a value of 0.988849 that shows that 98 percent changes in Real Gross Domestic Product of Nigeria could be attributed to the independent variables. 5. CONCLUSIONS This study examined the impact of capital market on the Nigerian economy, using time series data from 1981-2014. Cointegration and Granger Causality Tests and Ordinary Least Square method were employed in the empirical analysis. The variables employed for the empirical analysis were first subjected to unit root test to establish their stationarity. The unit root tests show that the variables were not stationary at level but all became stationary at first difference. That is the variables were integrated of the ordinary 1(1) at first difference. The cointegration test revealed that all the variables are cointegrated. That means, there exists a long-run equilibrium relationship between capital market and Nigerian economy. The Granger Causality test indicates that causality runs from RGDP → MCAP; MCAP → TURNR and TURNR → ASHI but not otherwise. That shows a unidirectional causality between the variables in the model. The OLS result indicates that the coefficient of determinations, i.e. the R-squared has a value of 0.988849. This implies that 98 percent changes in Real Gross Domestic Product of Nigeria could be attributed to the independent variables. The Market Capitalization and Turnover Ratio were positively related to Nigerian economy, having coefficient values of 0.899656 and 0.375083 with t-statistic of 14.60231 and 2.879237 respectively, while All Share Index (ASHI) was found to be negatively related to Nigerian economy with coefficient value of -0265177 and t-statistic value of -5.667988. The implication of these findings is that the capital market in Nigeria appears not to be contributing enough to the economy as All Share Index (ASHI) (seen in economic literature as a better stock market indicator than Market Capitalization and Turnover Ratio) has a negative impact on the economy. Also, the stock traded turnover ratio that is described in economic literature as a better stock market indicator than market capitalization was found to be weak in determining the level of economic growth of Nigeria. Therefore, the findings support the Efficient Market Hypothesis for a better performance of financial market and stock exchange market in question, in Nigeria. We therefore, recommend improved information on past performances of companies, equity returns, and equity prices and stock/company listing to avoid unreasonable speculation by investors in financial assets. http://www.iaeme.com/IJM/index.asp 140 editor@iaeme.com
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