an econometric analysis of capital market performance - journal

ijcrb.webs.com

INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS

COPY RIGHT © 2013 Institute of Interdisciplinary Business Research 165

FEBRUARY 2013

VOL 4, NO 10

AN ECONOMETRIC ANALYSIS OF CAPITAL MARKET PERFORMANCE

AND ECONOMIC GROWTH OF NIGERIA

Author names and Affiliations,

BENEDICT ANAYOCHUKWU OZURUMBA Ph.D ( Corresponding Author)

Department of Management Technology,

Federal University of Technology, Owerri

P.M.B. 1526, Owerri, Nigeria.

EMMANUEL EZEJI CHIGBU Ph.D

Department of Management Technology,

Federal University of Technology, Owerri

P.M.B. 1526, Owerri, Nigeria.

Abstract

This research work investigated the econometric analysis of capital market performance economic growth of

Nigeria. The objectives of the research include: to examine the impact of capital market on economic development,

determine the direction of causality between capital market performance and economic development and to

determine the transmission mechanism between capital market performance and economic development in Nigeria.

The data were collected from Central Bank of Nigeria (CBN) statistical bulletin. The data were consequently

analyzed using statistical package E-view 7.0. The methodology used was multiple regression analysis to capture the

impact of capital market on economic development and the transmission mechanism between the variables, while

Granger causality tests was used to determine the direction of causality between the variables. The ADF test shows

that the variables are non-stationery at level form but became stationery after first differences suggesting that the

variables are random walk series. Evidence from Johansen co-integration test shows that the variables are co-

integrated implying that there is a long run equilibrium relationship between capital market and economic

development in Nigeria. The results further showed that there is a significant impact of capital market on economic

development in Nigeria. In the case of causality test, evidence of the result showed that there is a unidirectional

causality running from economic development to capital market in Nigeria while Capital market affect economic

development through all share index (ASI), value of shares traded (VST) and number of deals (NOD).

Recommendations were made based on empirical findings which includes; policies that will deepening the capital

market should be pursued as well as strengthening of supervisory and regulatory bodies in the market and among

others.

Keywords: Capital market, Economic growth, Economic development, Equity, Liquidity, Nigerian Stock Exchange,

Stock.

1.0 Introduction

The Nigerian Stock Exchange evolved from the Lagos Stock Exchange. It became the Nigerian Stock Exchange in

1977 with branches established in different parts of the country. As at the end of 2009 there were nine branches at

Lagos, Abuja, Kano, Onitsha, Ibadan, Yola Kaduna, Port Harcourt and Onitsha (Mordi et al, 2010). Each of the

branches had a trading floor. The stock exchange creates a market place where companies can raise capital, often

referred to as primary market. At this market shares are issued for the first time to the public and shareholders can

trade in shares of listed companies, that is, secondary market. At this market, shareholders buy and sell existing

shares.

The impact of the Nigerian stock exchange in the economy will be broadly traced into how it helped the capital

market in the privatization and commercialization exercise. Privatization is a process or measure which reduces

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

government involvement in economic activities. In other words it could be defined as the transfer of state assets to

the private sector (Alile 1999).

Commercialization is defined as the reorganization of enterprises wholly or partly owned by the federal government

in which such commercial enterprises shall operate as profit making commercial ventures without any intervention

from the federal government (Anyanwu 1993).

Stock exchange actually helps the stock market in privatization because apart from handling the efficiency of all the

affected companies and reducing their repellence on government, privatization has deepened in stock market to

accommodate foreign investors and thereby enables the country to take full advantage of the opening up of the

market (CBN Bulletin 1999).

The Nigerian stock exchange have been promoting a wide spread ownership of quoted companies. Apart from

promoting wide spread ownership of shares, the stock market also helped in the socio-economic integration of all

areas of the country hence we have efficient utilization of the nation’s scarce resources by the stock market and

facilitate the development of the economy (Alile 1999).

Mobilization of resources for national development has long been the central focus of many development

economists and policy makers. The investment that promotes economic growth and development requires long term

funding, far longer than the duration for which most savers are willing to commit their funds. Capital market is a

collection of financial institutions set up for the granting of medium and long - term loans. It is a market for

government securities, for corporate bonds, for the mobilization and utilization of long term funds for development;

the long term end of the financial system. In this market, leaders (investors) provide long term funds in exchange for

long term financial assets offered by borrowers (Olagunde, et al, 2006).

Existing literature clearly shows that the developed economies had explored the channels through which resources

mobilization affect economic growth and development- money and capital markets (Samuel, 1996; Demirgue- Kunt

and Levine, 1996). According to Nyong (1997), this is not the case in developing economies like Nigeria where

emphasis is placed on money market with little consideration for capital market. Since the introduction of Structural

Adjustment Programme (SAP) in Nigeria, the country’s stock market has grown very significantly (Alile, 1996;

Soyode, 1990). This is as a result of deregulation of the financial sector and the privatization exercises, which

exposed investors and companies to the significance of the stock market. Equity financing became one of the

cheapest and flexible sources of finance from the capital market and remains a critical element in the sustainable

development of the economy (Okereke- Onyiuke, 2000).

Although capital market is expanding owing to expansion in stock market, it is however characterized by

complexities. The complexities arise from trends in globalization and increased variety of new instruments being

traded: equity options, derivatives of various forms, index futures, etc. However the central objectives of the stock

exchanges worldwide remain the maintenance of the efficient market with attendant benefit of economic growth

(Alile, 1997).

The Nigerian Stock Exchange, outstripped only by South Africa Stock Exchange, is the second largest equity

market in sub-Saharan Africa. Roughly 266 companies are listed on the Exchange, with banks accounting for more

than half of total market capitalization (Muhlberger, 2010). The market witnessed an unprecedented growth in both

the volume and scale of its activities, which was stimulated by the concluded banking sector consolidation. A

process which saw the collapse / merger of eighty nine (89) weak banks into twenty five (25) strong banks with a

capital base of over five hundred billion naira (about $4.3 billion). The spillover effect of the global crisis set in as

investors in the market began reaping huge inflationary income from excessive bank credits nurtured by

capitalization of the banks and massive inflows of portfolio investments (Aliyu, 2009).

The impact of capital market on economic development has often generated strong controversies among analysts

based on their study of developed and emerging markets (Samuel, 1996; Onosode, 1998; and Emenuga, 1998).

According to Nyong (1997) the financial structure of a firm, that is, the mix of debt and equity financing changes as

economies develop. The tilt is however, more towards equity financing through the stock market. As economies

develop, more funds are needed to meet the rapid expansion. The stock market serves as a veritable tool in the

mobilization and allocation of savings among competing uses which are critical to the growth and efficiency of the

economy (Alile, 1984).

The determination of the overall growth of an economy depends on how efficiently and effectively capital market

performs its allocation and mobilization of funds. As the stock market mobilizes savings, concurrently allocates a

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

larger proportion of its funds to the firms with relatively high prospects as indicated by its 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 (Ologunde et al, 2006).

It is therefore, not surprising that governments across the world have continued to pursue policies that encourage

growth in the capital market, being perceived as a vital economic sector for economic development (Nzota, 1999;

Okereke, 2004; and Oyerinde et al, 2005). In Nigeria, some of the programmes aimed at facilitating growth in the

capital market include the introduction of Structural Adjustment Programme (SAP) in 1986 and its attendant’s

deregulation of the economy (Odife, 1989). Another programme was the Bureau for Public Enterprises charged with

the responsibility of disinvesting government interest in some key industries and most recently the banking

capitalization policy.

However, there has been concerns by individuals and even corporate bodies alike as to whether the Nigerian capital

market is actually achieving this laudable goal of capital market-led-development. To this end, this research work

seeks to answer the following questions:

What is the impact of capital market on economic development in Nigeria? What is the direction of causality between capital market performance and economic development in

Nigeria? What is the transmission mechanism between capital market performance and economic development in

Nigeria?

The objective of this paper therefore is to examine the econometric analysis of capital market impact on

economic development in Nigeria. Towards this end, the paper in Section two discusses the theoretical

framework. Section three and four contain the methodology, results and discussion of findings while

Section five is the conclusion and recommendations.

1.1 Scope and Objectives

Following the research question, the broad objective of this study is to determine the impact of capital market on

economic development in Nigeria using Nigerian Stock Exchange (NSE) as a case of study. The specific objectives

are as follows:

To determine the impact of capital market on economic development in Nigeria.

To determine the direction of causality between capital market performance and economic development in

Nigeria.

To determine the transmission mechanism between capital market performance and economic development

in Nigeria.

The researcher intends to review the structure and relevant aspects of operations and developments in the Nigerian

capital market, with main focus on the determination of the impact of capital market on economic development in

Nigeria.

Therefore, the study is not to compare the Nigerian capital with those of other countries, because theoretically and

practically, capital market are basically the same but may differ in their levels of developments. The study will be

restricted to a period of twenty four years from 1986 to 2009. The choice of the timeframe is predicated by the fact

that the Nigerian capital market witnessed a lot of changes with the introduction of the 1986 SAP and its obvious

implication (Akujuobi, 2005).

The major limitation in this study is that it will rely only on secondary data generated from the publications of

Nigerian Stock Exchange (NSE), Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN) and

National Bureau of Statistics (NBS) as well as other materials relevant to the study as access to these materials is

difficult.

2.0 LITERATURE REVIEW

In recent years, there has been a growing concern on the role of capital market on economic development.

According to Nyong (1997), the capital market is viewed as a complex institution imbued with inherent mechanisms

through which long-term funds of the major sectors of the economy comprising of households, firms and

government are mobilized, harnessed and made available to various sectors of the economy. The development of the

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

capital market, and apparently the stock market, provides opportunities for greater funds mobilization, improved

efficiency in resource allocation and provision of relevant information for appraisal (Inanga and Emeruga, 1997).

Stock market contributes to economic growth the specific services it performs either directly or indirectly. Notably

among the functions of the stock market are mobilization of savings, creation of liquidity, risk diversification,

improved dissemination and acquisition of information, and enhanced incentive for effectiveness of these functions

through prompt delivery of their services which can augment the rate of economic growth. At any stage of nation’s

development, both the government and the private sectors would require long-term capitals. For instance, companies

would need to build new factories, expand existing ones, or buy new machinery. Government on their part would

require funds for the provision of infrastructures. All these activities require long term capital, which is provided by

a well functional capital market.

Capital market may also affect economic activities through the creation of liquidity. Liquid equity market makes

available savings for profitable investment that requires long term commitment of capital. Hitherto, investors are

often reluctant to relinquish control of their saving for long periods. As asserted by Bencivenga, Smith and Starr

(1996), without liquid capital market there would be no industrial revolution. This is because savers would be less

willing to invest in large, long term projects that characterized the early phase of industrial revolution.

Closely related to liquidity is the function of risk diversification. Stock markets can affect economic growth when

they are internationally integrated. This enables greater economic risk sharing. Because high returns projects also

tend to be comparatively risky, stock markets that facilitate risk diversification encourage a shift to higher- return

project (Obstfeld, 1994). The resultant effect is a boost in the economy leading to growth through shifting of

society’s savings to higher-return investment.

Accelerated economic growth may also result to acquiring information about firms. Rewards often come to an

investor able to trade on information, obtained by effective monitoring of firms for profit. Thus, improved

information will improve resource allocation and promote economic growth. The nature and economic significance

of the relationship between capital market and economic growth vary according to a country’s level of economic

development with a larger impact on less developed economies (Filler and Campos, 1999). The proponents of

positive relationship between capital market and economic development hinged their argument on the fact that

capital market through stock market aids economic growth and development through the mobilization and allocation

of savings, risk diversification, liquidity creation ability and corporate government improvement, among others.

Nyong (1997) reported that as far as 1969, Goldsmith observed that the emergence of equity markets and its rapid

development indicate the level of economic growth and development.

Using the liquidity argument, Bencivenga, Smith and Starr (1996) reasoned that the level of economic activities is

affected by the stock market through its liquidity creation ability. The logic of this reasoning is that profitable

investment requires long term capital commitment; often, investors are not willing or are reluctant to trade their

savings for a long term gestation period. With liquid equity markets, risks associated with investment are reduced,

making it more attractive to investors. Thus, the easy transfer of capital ownership facilitates firms’ permanent

access to capital raised through equity issues. Therefore, as liquid market improved the allocation of capital, the

prospect for long term economic growth is enhanced. Also, savings and investment are increased due to reduction in

the riskiness of investment facilitated by stock market liquidity.

However, an alternative view on capital market and long term economic growth as observed by Demirgue-Kune and

Levine (1996), that there are some channels through which liquidity can deter growth.

Firstly, savings rate may be reduced. This happens when there is increasing return on investment through income

and substitution effect. As savings rate falls and with the existence of externality attached to capital accumulation,

greater stock market liquidity could slow down economic growth. Secondly, reducing uncertainty associated with

investment may impact on savings rate, but the extent and the direction remain ambiguous. This is because it is a

function of the risk-averseness of economic agents. Thirdly, effective corporate government often touted as an

advantage of liquidity of stock market dispose off many weaken investors’ commitment and serves as a disincentive

to corporate control and vigilance on the part of investors thereby negating their role of monitoring firms

performance. This often culminates in stalling economic growth.

Edo (1995) asserts that securities investment is a veritable medium of transforming savings into economic growth

and development and that a notable feature of economic development in Nigeria since independence is the

expansion of the stock and shares. Osinubi (1998) reported that Harry Johnson in 1990 recognized that one of the

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

conditions of being developed pertains to having a large stock of capital per head, which must always be replaced

and replenished when used. Where this is lacking the condition of being under developed prevails.

The Structural Adjustment Programme (SAP) promoted by the World Bank and the International Monetary Fund

embarked upon by the developing countries, according to Soyode (1990) emphasized that self- sustaining growth

process requires substantial investible resources which are readily available at the capital market via stock market.

Levine and Zervos (1996) examined whether there is a strong empirical association between capital market

development and long run economic growth. The study used pooled cross- country time series regression of forty-

one countries from 1976 to 1993 to evaluate this association. The study toe the line of Demirgue- Kunt and Levine

(1996) by conglomerating measures such as stock market size, liquidity and integration with world markets, into

index of stock market development. The growth rate of Gross Domestic Product (GDP) per capita was regressed on

a variety of variables designed to control for initial conditions, political stability, investment in human capital, and

macroeconomic conditions; and then include the conglomerated index of stock market development. The finding

was that a strong correlation between overall stock market development and long run economic growth exist. This

means that the result is consistent with the theories that imply a positive relationship between stock market

development and economic growth.

Efforts were also made by Nyong (1997) to develop an aggregate index of capital market development and use it to

determine its relationship with long run economic growth in Nigeria. The study employed a time series data from

1970 to 1995. For measures of capital market development the ratio of market capitalization to GDP (in percentage),

the ratio of total value of transactions on the main stock exchange to GDP (in percentage), the value of equities

transaction relative to GDP and listings were used. The four measures were combined into one overall composite

index of capital market development using principal component analysis. A measure of financial market depth

(which is the ratio of broad money to stock of money to GDP) was also included as a control variable. The result of

the study was that capital market development is negatively and significantly correlated with long run economic

growth in Nigeria. The result also showed that there exits bi-directional causality between capital market

development and economic growth.

3.0 METHODOLOGY

This study examines the impact of capital market on economic development in Nigeria using Nigeria Stock

Exchange, as a case of study. Gross domestic product (GDP) shall be used as proxy for economic development

while stock market capitalization (SMC), all shares index (ASI) and value of shares traded (VST) shall be used as

stock market indicators.

Given the preceding discussion, the capital market performance model can be specified as follows:

RGDP = f (SMC, VST, ASI, INF, INT) ------------------------------------------------------ (1)

Where

RGDP = Real Gross domestic product as a proxy for economic development

SMC = Stock Market Capitalization

VST = value of shares traded

ASI = All shares index

INF = inflation rate

INT = real interest rate.

INF and INT are control variables used to control for omitted variable bias.

Model (1) transforms to equation (2) for the purpose of empirical computation

RGDP = α0+ α1SMC + α2ASI + α3 VST + α4INF + α5INT + e -------------------------------------- (2)

Where

α0 - = the constant or intercept

αs = coefficient of respective independent variables

e = error term

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

Following this test, equation 2 converges to equation (3) below.

RGDP = α0 + α1SMC + α2ASI + α3VST + α4INF + α5INT + e ----------------------------------------- (3)

Where = difference operator

If the unit root test shows evidence of co-integration, equation (3) will be transformed to an error correction

model (ECM) thus

RGDP = α0 +α1SMC + α2ASI + α3VST + α4INT + α5INF + ECM + e ------------------------------- (4)

Where

= the coefficient of ECM which shows the speed of adjustment

3.1 MODEL JUSTIFICATION

The choice of a particular model depends on whether the model is adequate to capture the objectives of the

study. Thus, this model is adopted based on the fact that it is good for impact analysis. Also, its choice is predicated

on its advantages of best linear unbiased estimate (blue) (Gujarat, 2003).

4.0 DATA SOURCE/ESTIMATION TECHNIQUE

The data shall be obtained from central Bank of Nigeria (CBN) statistical bulletin 2009. The research shall

use E-views software for the analysis because of estimation accuracy.

4.1 DESCRIPTIVE STATISTICS

The characteristics of the distribution are presented in table 1 below.

Table 4.1: Descriptive Analysis of Result.

RGDP SMC VST ASI NOD INT INF

Skewness 0.8863 2.1593 2.5379 1.6647 2.0145 0.4856 1.2042

Kurtosis 2.3817 6.9221 8.7706 5.6010 6.3319 3.4233 3.1104

Jarque-Bera 3.5244 34.034 59.063 17.851 27.335 1.1226 5.8131

Probability 0.17 0.0000 0.0000 0.000 0.0000 0.5704 0.0057

Source: Computer Analysis using E-views

Kurtosis is a measure of the peakedness and flatness of the distribution of the series. From the table above, stock

market capitalization, value of shares traded, all share index and number of deals are leptokurtic relative to its

normal distribution since their kurtosis values are greater than 3. However, real gross domestic product as a proxy

for economic development, interest rate and inflation rate are platykurtic suggesting that its distribution is flat

relative to normal distribution.

Skewness which is a measure of the shape of the distribution shows that real gross domestic product and interest rate

are bell-shaped or asymmetric while those of SMC, VST, ASI, NOD and INT suggest a long tail to the right since

their values are greater than 1.

Jarque-Bera is a statistical test that determines whether the series is normally distributed. This statistic measures the

difference of the skewness and the kurtosis of the series with those from the normal distribution. The null hypothesis

is that the series is normally distributed. Evidently, the Jarque-Bera statistic rejects the null hypothsis of non-normal

distribution for INF, NOD, ASI, VST and SMC. However, the null hypothesis of non-normal distribution is

accepted for real gross domestic product and interest rate since their probability values are greater than 0.05. Thus,

we conclude that INT and real GDP are not normally distributed while the others are.

4.2 UNIT ROOTS TEST RESULT

In this study, the Augmented Dickey Fuller (ADF) unit roots tests was employed to test for the time series properties

of model variables. The null hypothesis is that the variable under investigation has a unit root against the alternative

that it does not. The decision rule is to reject the null hypothesis if the ADF statistic value exceeds the critical value

at a chosen level of significance (in absolute term). These results are presented in table I below.

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

Table 4.2: Unit Roots Test Result

Variable ADF statistics ADF statistics

Level Critical values 1st difference Critical values

RGDP 0.836224 1% -3.7856

5% -3.0114

10% -2.6457

-6.390305 1% -3.7856

5% -3.0114

10% -2.6457

SMC -1.172246 1% -3.7497

5% -2.9969

10% -2.6381

-4.514605 1% -3.7.667

5% -3.0038

10% -2.6417

VST -1.474149 1% -3.7497

5% -2.9969

10% -2.6381

-3.364496 1% -3.7497

5% -2.9969

10% -2.6381

ASI -1.460797 1% -3.7497

5% -2.9969

10% -2.6381

-4.638490 1% -3.7497

5% -2.9969

10% -2.6381

INT

-1.886314 1% -3.7497

5% -2.9969

10% -2.6381

-3.602870 1% -3.7497

5% -2.9969

10% -2.6381

INF

-1.770355

1% -3.7497

5% -2.9969

10% -2.6381

-4.428090

1% -3.7497

5% -2.9969

10% -2.6381

NOD -1.087744 1% -3.7497

5% -2.9969

10% -2.6381

-7.428518 1% -3.7497

5% -2.9969

10% -2.6381


The results of table 2 above show that all the variables are non-stationary in level form since their ADF values are

less than the critical values at 5% and 10%, the null hypothesis of no unit root was accepted for all the variables but

was rejected in 1st difference. Thus, we conclude that the variables under investigation are integrated of order one. (

i.e. I(1)). Since the variable are integrated of the same order. We therefore, examine their co-integrating relationship

using Johansen co-integration procedure.

4.3 CO - INTEGRATION TEST RESULT

A necessary but not sufficient condition for co-integrating test is that each of the variables be integrated of the same

order. The Johansen co-integration test uses two statistics test namely: the trace test and the likelihood eigenvalue

test. The first row in each of the table test the hypotheses of no co-integrating relation, the second row test the

hypothesis of one co-integrating relation and so on, against the alternative of full rank of co-integration. The results

are presented in table 3 below.

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

Table 4.3: Co-integrating Test Result between the Variables: RGDP SMC ASI VST INF INT

Eigen value Likelihood Ratio 5% critical value 1% critical value Hypothesized No of

CE(s)

0.948731 157.7665 95.15 103.18 None**

0.881480 92.41197 68.52 76.07 At most 1**

0.66753 45.49313 47.21 54.46 At most 2

0.452108 21.26652 29.68 35.65 At most 3

0.305692 8.029611 15.41 20.04 At most 4

0.000143 0.003152 3.76 6.65 At most 5


*(**) denotes rejection of the hypothesis at 5% (1%) significance level.

L.R. test indicates 2 co-integrating equation(s) at 5% level of significance

4.3.1 INTERPRETATION OF CO-INTEGRATING RESULTS

From table 3 above, the likelihood statistics indicates the presence of two co-integrating equations at 5%

significance level which implies that capital market and economic development (RGDP) are co-integrated. This

shows that there is a long-run relationship capital market proxied by stock exchange market indicators and economic

development

Table 4.4: Multiple Regression Results: Dependent variable: RGDP

Coefficient

Standard errors t- statistics probability

Constant 282253.6 80227.25 3.518177 0.0025**

SMC -31.95205 29.75764 -1.073745 0.2971

VST 0.210951 0.106232 1.985751 0.0625*

ASI 10.18428 3.736978 -0.113876 0.0139**

INT -450.3342 3954.618 -0.13876 0.9106

INF -422.2208 840.5534 -0.50233 0.6215

R2 0.820966

Adjusted R2 0.771234

Durbin Watson 1.235103

F statistics 17.77539

Prob (F- stat.) 0.00004**


** (*) denotes variable is significant at 1% (5%) significance level

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

4.3.2 INTERPRETATION OF MULTIPLE REGRESSION RESULTS

From table 4 above, the estimated equation is stated below:

RGDP = 2.82253.6 – 31.95SMC + 0.21VST + 10.18ASI – 450.33INT – 422.22INF------------------------- (1)

From equation (1) as in table 4, the regression result shows that stock market capitalization has a negative and

insignificant impact on economic development. This is contrary to the a priori economic theory which postulates

that increase in stock market capitalization will lead to increase in economic development. The coefficient of 31.95

suggests that a 1 unit increase in SMC will lead to a decrease in RGDP by N31.95m.

Value of Shares Traded (VST) has a positive and significant impact on economic development. This is in line with

the economic theory. Specifically, 1 unit increase in VST will lead to about N0.21M increase in RGDP. ASI has a

positive and significant relationship with RGDP. This corresponds with a priori expectation implying that increase

in ASI will lead to increase in national income, which in turn, will lead to increase in RGDP. Interest rate has a

negative but insignificant impact on economic development. This is in line with theory postulates suggesting that

high interest rate will increase investor’s cost of fund and hence decreases investment. This in turn leads to a

decrease in economic development. Inflation rate is negatively and insignificantly related to RGDP. The sign is in

conformity with what the theory says implying that a high inflation rate deter investors from investing and hence a

decrease in RGDP.

Interestingly, the overall regression is highly significant at 1% level of significance. This suggests that the joint

effects of all the included variables are significant. The value of coefficient of determination and adjusted coefficient

of determination are 0.82 and 0.771 respectively. These suggest that the model is highly fitted. Specifically, the

coefficients suggest that about 82% of the variation in economic development is caused by variation in the

explanatory variables. The remaining 18% is explained by the error term. Durbin Watson statistic of 1.2 shows that

there is positive serial autocorrelation in the model.

Table 4.5: Simple Regression Results: Dependent variable: RGDP

Variables Coefficient Standard errors t- statistics Probability

Constant 288495.3 18315.94 15.75105 0.000**

NOD 0.153646 0.017233 8.915868 0.000**


** (*) denotes variable is significant at 1% (5%) significance level

4.4 INTERPRETATION OF SIMPLE REGRESSION RESULTS

The estimated model is stated below:

RGDP = 288495.3 + 0.15NOD

From the estimated model, it is seen that Number of Deals (NOD) is positively and significant related with RGDP.

This implies that increase in NOD will lead to an increase in RGDP. Specifically a one unit increase in number of

deals in Nigerian Stock Exchange will lead to an increase in RGDP by N0.15m. The coefficient of determination

suggests that about 78.3% of the variation in RGDP is explained by changes in NOD. The overall regression result

shows that the effect of NOD is highly significant at 1% level of significance.

Following objective two, the direction of causality between capital market and economic development was tested

using pair-wise Granger causality test. The result is presented in table 6 below. The null hypothesis of no direction

of causality was tested against the alternative that there exists a direction of causality between the variables.

In our case, there are four possibilities namely:

1. Unidirectional causality from capital market (SMC) to economic development (RGDP) when the

coefficient of SMC is statistically significant.

2. Unidirectional causality from economic development (RGDP) to financial development (SMC) when the

coefficient of RGDP is statistically significant.

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

3. Feedback or bidirectional causality when the sets of RGDP and SMC coefficients are statistically

significant.

4. Finally, mutual independence, when SMC and RGDP coefficient are statistically insignificant.

Table 4.6: Pairwise Granger Causality Test Results

Null hypothesis F-statistical P-value Conclusion

SMC does not granger cause RGDP

RGDP does not granger cause SMC

0.01978

6.97837

0.98043

0.00613

Do not reject Ho

Reject Ho


4.5 INTERPRETATION OF PAIR-WISE GRANGER CAUSALITY TEST RESULT

From table 6 above, the causality test reveals that economic development proxied by RGDP Granger causes capital

market proxied by SMC. This indicates that there is a unidirectional causality running from economic development

to capital market. The conclusion was arrived based on the fact that the F-statistics for SMC was statistically

significant at 5% as indicated by their p- values. This result validates the Endogenous growth theory implying that

the state of the Nigerian economy will determine the capital market performance.

4.6 TEST FOR MULTICOLLINEARITY

Multicollinearity test is used here to ascertain the violation of the assumption of randomness of the explanatory

variables of the model. In carrying out the test, we made use of the correlation matrix table.

Decision Rule:

If the pair–wise or zero–order correlation coefficient between two explanatory variables is high, say in excess of

0.95, then multicollinearity is a serious problem (Gujarati, 2003).

Table 4.7: Correlation Matrix Result.

RGDP SMC VST ASI NOD INT INF

RGDP

1.000000 0.850876 0.804106 0.878 0.885005 -0.278419 -0.402

SMC 0.850876 1.000000 0.911278 0.936 0.939344 -0.321076 -0.33

VST

0.804106 0.911278 1.000000 0.785 0.924348 -0.317979 -0.2706

ASI

0.877741 0.936127 0.785170 1.0000 0.862865 -0.269343 -0.403

NOD

0.885005 0.939344 0.984348 0.8626 1.000000 -0.316633 -0.327

INT -0.278419 -0.321076 -0.317979 -0.2693 -0.316633 1.000000 0.264

INF

-0.402095 -0.332061 -0.270616 -0.4031 -0.327122 0.264627 1.000


ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

The result of correlation matrix shows evidence of no multicollinearity in the model since none of the partial

correlation coefficient or pair-wise correlation coefficient is greater than 0.95.

5.0 CONCLUSION

Based on the results of the study, I arrived at a number of conclusions.

All share index has significant impact on real gross domestic product.

Number of deals has significant positive impact on real gross domestic product in Nigeria.

Interest rate and inflation rate have negative but insignificant impact on economic development.

The pair-wise Granger causality test shows that there is a unidirectional causality running from

economic development to capital market in Nigeria.

Capital market affect economic development through all share index (ASI), value of shares traded

(VST) and number of deals (NOD).

5.1 RECOMMENDATIONS

Based on the research findings, the following recommendations are made.

Since there is significant impact of capital market on economic development, policies that will deepen

capital market in order to drive Nigeria’s economic growth should be pursued.

Since high but sustainable economic development leads capital market in Nigeria, there is need to address

the decay in the critical infrastructures like power, transport, water etc, as this will reduce the cost of

funds, operating cost, increase firms’ profits and stabilize stock prices which will enhance capital market

and sustain the momentum for growth.

Efforts should be devoted to strengthening of supervisory and regulatory bodies in the financial system.

ijcrb.webs.com



FEBRUARY 2013

VOL 4, NO 10

REFERENCES

Akujuobi, A.B.C. (2005): “The Patterns of Investment in the Nigerian Capital Market and Impact on Economic

Development of Nigeria, 1986- 2004”. Unpublished Ph.D Dissertation, School of Management Technology,

Federal University of Technology, Owerri.

Alile, H. (1997): “Government Must Divest”. The Business Concord of Nigeria 2nd

December, 1997. Pp.8.

Alile, H.I (1984): “The Nigerian Stock Exchange: Historical Perspective, Operations and Contributions to

Economic Development”. Central Bank of Nigeria Bullions, Silver Jubilee edition vol. 2 pp 65-69.

Alile, H (1996): “Dismantling Barriers of Foreign Capital Inflows”. The Business Times of Nigeria 2nd

December,

1996. Pp.8.

Aliyu, S.U.R. (2009): “Stock Prices and Exchange Rate Interaction in Nigeria: An Inter-Global Financial Crises

Maiden Investigation”. Munich Personal REPEC Archiee.

Anyanwu, J.C. (1993): “Monetary Economics; Theory, policy and Institutions”. Hybrid Publishers ltd, Onitsha,

Nigeria.

Bencivenga, V.A; Smith, B.D and Starr, R.M. (1996): “Equity Markets, Transaction Costs, and Capital

Accumulations: An Illustrations”. The World Bank Review vol. 10 (2) pp. 241-265.

Demirgue-kunt, A. And Levine, R. (1996): “Stock Market, Corporate Finance and Economic Growth: An

Overview”. The World Bank Review vol. 10 (2) pp 223-239.

Dickey, D.A. and Fuller, W.A (1981): “Likelihood Ratio Statistics for Autoregressive Time Series with a Unit

Root”. Econometrica vol. 49 (4)

Edo, S.E (1995): “An Estimation of a Model of Long-run Securities Investment in Nigeria”, Nigerian Economic and

Financial Review vol. 1(2) pp. 45-53.

Emenuga, C.(1998): “Nigerian Capital Market and Nigerian Economic Performance at one Day seminar organized

by Nigeria Economic Society at the Institute of Foreign Affairs, Lagos. 21st January, 1998.

Filler, R.K., Hanousek, J. and Campos, N.F. (1999): “Do Stock Market Promote Economic Growth?” The William

Davidson Institute (University of Michigan Business School Working paper. Series No. 267 September, 1999.

Inanaga, I.L. and Emenuga, C. (1997): “Institutional, Traditional and Asset Pricing Characteristics of The Nigerian

Stock Exchange”. African Economic Research Consortium, Research paper 60, March 1997.

Levine, R. And Zeros, R. (1996): “Stock Market Development and Long-run Economic Growth”. The World Bank

Review vol. 10 (2)

Muhlberger M. (2010) “Talking Point: Nigeria Africa’s Oil giant up against homegrown Problems” Deutsche Bank

Research

Nyong, M.O. (1997): “Capital Market Development and Long-run Economic Growth: Theory, Evidence and

Analysis”. First Bank Review, December, 1997, pp 13-38.

Obstfeld, M. (1994): “Risk-taking, Global Diversification, and Growth”. American Economic Review vol. 84 pp.

1310-1324.

Okereke-Onyuike, N. (2000) “Stock Market Financing Options for Public Projects in Nigeria” The Nigerian Stock

Exchange Fact Book, 2000.

Olagunde, A.E et al (2006): “Stock Market Capitalization and Interest Rate in Nigeria: A Time Analysis”.

International Research Journal of Finance and Economics ISSN 1450- 2889. No. 4 (2006).

Onosode, G.O.(1998): “The Capital Market and Nigerian Economic Development” at one day seminar organized by

the Nigeria Economic Society at the Institute of International Affairs, Lagos. 21st January, 1998.

Osinubi, T.S. (1998): “Stock Market Development and Long-run Growth in Nigeria”, Unpublished M. Sc

Economics Dissertation, University of Ibadan.

Samuel, S. (1996): “Stock Market and Invesment: The Role of the Market”, The World Bank Review vol. 10 (2)

Soyode, A. (1996): “The Role of Capital Market in Economic Development”, Securities Market Journal Nigeria.

Vol. 6

Documents

an econometric analysis of capital market performance - journal