EFFECT OF NIGERIA MACRO ECONOMY ON SHARE PRICE VALUE DETERMINATION


EFFECT OF NIGERIA MACRO ECONOMY ON SHARE PRICE VALUE DETERMINATION

ABSTRACT

The pricing of stock in the capital market in any country is a strong indicator of general economic performance and is an integral part of the economy of any country. With the introduction of free and open economic policies and advanced technologies, investors are finding easy access to stock markets around the world. The study provided an overview of the Nigeria macro economy and its effect on bank share value, made use of Capital Asset Pricing Model CAPM couple with the use of past stock market price and dividend payout to determine the value of the bank stock, addressed the need and thus fill the void of empirical evidence on the use of capital asset pricing model in determining stock price value in a developing economy and provided more insight into the effects of various macroeconomic variables on stock price value in anticipation of increasing the conclave of empirical evidence in this regard. The study adopted the OLS multiple regressions methodology to determine the effect of the independent variables on the dependent variable. Secondary data was used for data collectionfrom Central Bank of Nigeria (CBN) statistical Bulletin, 2016 released on the 28t of July, 2017.WhileEviews 9 was used to conduct all estimations in the study. Results showed that there is a significant relationship between macroeconomic variables and share price in Nigeria. It was recommended there should be measures put in place by the government to curtail the increasing import in the midst of the increasing economic activities in the Nigerian economy.

TABLE OF CONTENTS

Title Page - - - - - - - - i

Approval Page - - - - - - - ii

Declaration - - - - - - - iii

Dedication - - - - - - - - iv

Acknowledgement - - - - - - v

Abstract - - - - - - - - vi

Table of Contents - - - - - - vii

CHAPTER ONE – INTRODUCTION

1.1Background of the Study-----

1.2Statement of General Problem----

1.3Objective of the Study------

1.4Research Questions------

1.5    Hypothesis   -      -      -      -      -      -      -        -        -        

1.6Significance of the Study-----

1.7Scope of the Study------

1.8Definition of Terms------

CHAPTER TWO – REVIEW OF RELATED LITERATURE

2.1 OVERVIEW OF THE NIGERIA MACRO ECONOMY

2.2 Theoretical Framework------

2.3 Empirical Review-------

CHAPTER THREE – RESEARCH METHODOLOGY

3.1Theoretical Framework------

3.2Model Specifications------

3.3 Estimation procedure-------

3.4 Diagnostic Test --------

3.5 Model justification-------

3.6 Data Sources--------

CHAPTER FOUR – DATA PRESENTATION AND ANALYSIS

4.1 descriptive statistics-------

4.2 Unit Root Tests--------

4.3 Cointegration test results------

4.4Estimation Results for model-----

4.5 Evaluation of Research Hypotheses---

CHAPTER FIVE – SUMMARY, CONCLUSION AND RECOMMENDATION

5.1 Summary of Findings ------

5.1 Policy Implications of Findings and Policy Recommendations

-------       ----

5.3 Conclusions-------

References --------

Appendix--------

CHAPTER ONE 

INTRODUCTION

Stock market reacts in response of various factors ranging from macro-economic, political and socio-cultural behavior of any country. Like any other stock market the Nigerian Stock exchange also reacts either positively or negatively by a number of factors occurring within or without the macroeconomic system. A stock exchange is an organized institution where the securities of joint stock companies are traded freely and the prices are determined by the forces of supply and demand. In simple, it is a place where buyers and sellers come together to exchange their holdings (shares, bonds, derivatives etc.) during on business hours.

Investment in equity shares in the stock exchange is one of the major avenues of investment that yields considerable returns to investors. It is also a source of finance for the capital requirements of firms. Returns from such equity investments are subject to vary owing to the movement of share prices, which depend on various factors which could be internal or firm specific such as earnings per share, dividends and book value or macro economic factors such as crude oil price/subsidy removal interest rate, GDP, inflation, government regulations and Foreign Exchange Rate (FOREX). Share price is used as a benchmark to gauge performance of a firm and its variations as an indicator of the economic health or otherwise of a firm hence the need to be conversant with the factors that could adversely affect share prices.

However, this study will provide an overview of the Nigeria macro economy and its effect on bank share value. This study will also make use of Capital Asset Pricing Model CAPM couple with the use of past stock market price and dividend payout to determine the value of the bank stock. The valuation from this analysis in this study will form a basis for signifying if the stock is overpriced or underpriced. Recommendations will also be made on if the bank stock should or shouldn't be bought for more or less.

1.1 BACKGROUND

The pricing of stock in the capital market in any country is a strong indicator of general economic performance and is an integral part of the economy of any country. With the introduction of free and open economic policies and advanced technologies, investors are finding easy access to stock markets around the world. The fact that stock market indices have become an indication of the health of the economy of a country indicates the importance of stock markets. This increasing importance of the stock market has motivated the formulation of many theories to describe the working of the stock markets and for determining share value (Gupta, Chevalier and Sayekt, 2008). An important example of which is the capital asset pricing model which is used in this study.

Moreover, researchers have found out that 30-35% of changes in stock price can be attributed to economy-wide factors (Chandra 2004). The variables employed in this study are essentially macro economy fundamentals, thus the study will therefore provide more details on fundamental analysis. That is, stock price value depends on the behaviour of fundamental factors. Thus, it can be argued that corporate earnings, which are they critical to stock price determination depend on such determinants as macro-economic growth, prosperity and output growth, the availability of quality labour force as well as capital stock (Golob and Bishop 1997). There are other factors which directly or indirectly bear on macro-economic growth and prosperity, and thus influence the value of stock prices (Oaikhena 2002). Maysami et al. (2005) identified short and long-term interest rates, industrial production, price levels, exchange rate and money supply using cointegration for Singapore stock market. From the foregoing, it therefore means that there exist some key variables used to describe the state of the macro economy that an investor must monitor and forecast. The essence is to get an idea of the future corporate earnings and the payment of dividends and interests. These key variables include: Gross Domestic Product (GDP), Industrial Growth Rate, Capacity Utilization, Savings and Investment, Price Level and Inflation, Interest Rates, Oil price, Balance of Payments, Foreign Exchange Reserves and Exchange Rates, and Supply of Money. In this study, the researcher will establish some empirical evidence relating selected macroeconomic variables to market index, a proxy for stock price value.

1.2 PROBLEM STATEMENT

The determinants of stock price value have evolved into a formidable area of research in empirical finance. The influx of research interest not withstanding there are indications that the issues involved in stock price determination are yet to be settled. The research findings with regard to the suitability of the Capital Asset Pricing Model in determining stock value have indicated conflicting results across countries. Specifically, developing economies have not provided adequate research findings. Furthermore there are also divergences with regard to which of the macroeconomic variables exerts significant influence on stock price value (Humpe and Macmillan 2007). Thus this study addresses the need and thus fills the void of empirical evidence on the use of capital asset pricing model in determining stock price value in a developing economy. Also the study provides more insight into the effects of various macroeconomic variables on stock price value in anticipation of increasing the conclave of empirical evidence in this regard. However, this study is limited to Wema bank

1.3 RESEARCH OBJECTIVES

The major objectives of the study are;

1. To provide an overview of the Nigeria macro economy and its effect on bank share value. 

2. To make use of Capital Asset Pricing Model CAPM couple with the use of past stock market price and dividend payout to determine the value of the bank stock.

3. To addresses the need and thus fill the void of empirical evidence on the use of capital asset pricing model in determining stock price value in a developing economy. 

4. And to provide more insight into the effects of various macroeconomic variables on stock price value in anticipation of increasing the conclave of empirical evidence in this regard. 

1.4 RESEARCH QUESTIONS

1. What are the effects of the macroeconomic variables on stock price value?

2. What is the relationship between risk premium and market premium? 

1.5 HYPOTHESIS

Ho: There is no significant relationship between risk premium and market premium 

1.5 SIGNIFICANCE OF THE STUDY

The outcome of the study will exert significant influence on stock price value. The study will also address the need and thus fills the void of empirical evidence on the use of capital asset pricing model in determining stock price value in a developing economy. Also the study will provide more insight into the effects of various macroeconomic variables on stock price value in anticipation of increasing the conclave of empirical evidence in this regard. However, this study is limited to Wema bank.

1.7 SCOPE OF THE STUDY

The study centers on the topic, effect of Nigeria macro economy on share price value determination. And is limited to Wema bank.

1.8 DEFINITION OF TERMS

MACRO ECONOMY: a large-scale economic system.

SHARE PRICE: is the price of a single share of a number of saleable stocks of a company, derivative or other financial asset. 

ECONOMY: the state of a country or region in terms of the production and consumption of goods and services and the supply of money.

Value Stock: A value stock is a security that is trading at a lower price than expected given the performance of the company and key performance indicators of the stock itself.

.

EFFECT OF NIGERIA MACRO ECONOMY ON SHARE PRICE VALUE DETERMINATION



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