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AN ANALYSIS OF THE IMPACT OF STOCK MARKET DEVELOPMENT ON ECONOMIC GROWTH IN NIGERIA

ACCOUNTING PROJECT TOPICS AND MATERIALS

CHAPTER ONE

INTRODUCTION

The mobilization of resources for national development has long been the crucial focus of development economists. This is because, for sustainable growth and development to take place, funds must be effectively mobilized and allocated to enable business and the economy harnesses their human, material and managerial resources for optimal output. It is against this background that every country has a financial system which serves as a mechanism for the mobilization of resources for the attainment of economic growth. Consequently, the more developed the financial system of an economy is, the more efficient it is likely to be in the mobilization and allocation of resources for development purposes. The financial system of any society is the framework within which capital formation takes place. According to Odife (1994), it is the framework within which the savings of some members of the society are made available to other members of the society. Put differently, it is the arrangement or mechanism by which the savings surplus units of the economy transfer their resources to the borrowing deficit units for the purpose of enhancing economic growth (Okereke – Onyiuke, 2009). The financial system is made up of two major markets. These are the money market and the capital market. According to Elakama (2009), the two markets are at the heart of the financial system.

The money market is a type of market where short term funds and securities such as treasury bills, inter-bank deposits, Banker’s acceptance, certificate of deposits etc whose tenor are usually shorter than or equal to a year are bought and sold. In other words, it is a market where short term capital is sourced. The capital market on the other hand is a type of market where long term debt instruments whose tenor exceeds a year are traded. According to Sulaiman (1999), it is a network of interrelated institutions governed by operational guidelines, which permit the sale of equity and long term debt. Furthermore, Al-Faki (2006) describes the capital market as a network of specialized financial institutions, series of mechanism, processes and infrastructure that, in various ways, facilitate the bringing together of suppliers of medium to long term capital for investment in socio-economic development projects. Instruments traded in the capital market include equities, debts, government bonds, corporate bonds, preference shares, debentures, rights etc. Within the broad classification of the capital market is the stock market, which operates as the rallying point for the overall activities in the capital market. According to Alile and Anao (1984), the stock market is the pivot around which every activity in the capital market revolves. Its follows therefore that without the facilities provided by the stock market, it is doubtful if the capital market can efficiently perform its expected role of resource mobilization (Ologunde, Elumilade and Asaolu, 2006). It is in the light of the above that the stock market is considered a vital element in the mobilization and allocation of resources in any modern economy. Until now, the literature has mainly focus on the role of financial inter-mediation in the process of economic growth and capital accumulation. Indeed, many studies have analyzed the channels through which banks and other financial intermediaries may help to increase, for example, the savings rate or the average productivity of capital and, in turn growth.

Recently, however, with the upsurge in world stock markets and with a large proportion of this boom accounted for by emerging markets, there has been a growing interest among economists and policy makers on the role played by stock market development in the process of economic development. Recent research has therefore begun to focus on the linkage between the stock market and economic development. It is no wonder, that the World Bank Economic Review dedicated its May 1996 issue to the role of the stock market in economic growth. The stock market also known as the stock exchange or equity market performs some functions that promote the growth of the economy (Osinubi, 2004). Firstly, as an economic institution, the stock market promotes efficiency in capital formation and allocation. Secondly, the stock market serves as a veritable tool in the mobilization and allocation of savings among competing uses which are critical to growth of the economy. Thirdly it enables governments and industry to raise long term fund for financing new projects and expanding and modernizing industrial/commercial concerns, thereby increasing the quantity and quality of investment. Fourthly, by performing its function of allocating capital efficiently, the stock market, as it mobilize savings concurrently allocates a larger proportion of it to the firms with relatively high prospects as indicated by their 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. Additionally, the stock market performs the functions of inter-mediating between the needs of firms and investors; providing a means of sharing investment risks; providing information about companies, promoting and providing the means of improving corporate governance etc.

Furthermore, well functioning stock market provides low cost equity capital for firms imposes control on the investment behaviour of firms through continuous adjustment of shares and serves as a mechanism for attracting foreign portfolio investment. Given the above functions, it is expected that the development of the stock market will both enhance and lead to growth of the economy. In recognition of the importance of the stock market in economic development, many developing countries have launched stock exchanges during the past few decades. This explains the drive toward the establishment of stock exchanges in African countries especially during the past two decades, with new stock markets established in Ghana, Malawi, Swaziland, Uganda and Zambia. Prior to 1989, there were just eight stock markets in Africa, of which three were in North Africa and five in Sub-Sahara Africa. At present, more than 50% of the fifty four African countries operate stock exchanges, accounting for over twenty-two stock exchanges in Africa (Komo, 2008). According to Komo, this rapid expansion of stock exchanges in Africa has contributed to economic development in various ways, which amongst others include facilitating the privatization process, diversifying the financial services, facilitating long term capital mobilization, provision of alternative investment opportunities, attracting capital inflow and serving as a signal of overall macroeconomic performance. Aware of the crucial role played by the stock market in any modern economy, the Nigerian government in 1960 established the Nigerian Stock Exchange (NSE). Like many African countries, Nigeria has invested in developing her stock market as a means of providing opportunities for greater fund mobilization and improved efficiency in resource allocation. This study therefore examines whether stock market development promote growth in Nigeria.

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