SECURITIES AND EXCHANGE MARKET AND THE NIGERIAN ECONOMY; ADAPTIVE EXPECTATION HYPOTHESIS 1990 - 2015
ABSTRACT:
This research work is on the impact of The Nigerian Securities Exchange Market and the Nigerian Economy. The main objective of this study is to empirically examine the impact of Nigerian Securities Exchange Market and the Nigerian Economy: A Test of the Adaptive Expectation Hypothesis. This research work made use of secondary data which were obtained from the Central bank of Nigeria Statistical Bulletin (2015). The data were collected for a period of twenty six years (i.e. 1990-2015). The Ordinary Least Square Regression Technique was employed in the analysis of the data. Based on the empirical analysis, it is concluded that security and exchange market has significant impact on gross domestic product in Nigeria. It is therefore recommended that; The funds raised by government in the form of government securities in the capital market should be put into productive sectors of the economy that will necessitate to growth in all facets of the economy and hence bring about job creation vis a vis increase in standard of living.
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
A stable securities exchange market plays a major role in the growth and development of any country. This raises the need to examine the Nigerian securities exchange market. The country has a growth domestic product (GDP) of about $510 billion. However, most recently, the country has been experiencing reduction in growth in the securities exchange market and in its GDP. Gross domestic product indicators also show that Nigerian securities exchange and the economy are experiencing slow growth. Due to the bearish mode of the securitiesexchange market, investors have developed a pessimistic attitude towards the market (Olusegun, Oluwatoyin, Fagbeminiyi, 2011). The market has been performing poorly in the region due to withdrawal of investors in the market. Despite the fall of the Nigerian securities exchange market, the debt to GDP ratio of the country is still at 19.39 percent while other countries maintain their GDP at fifty-six percent. Additionally, the adaptive expectation hypothesis has a great contribution in the fall of the capital market. Adaptive expectation hypothesis states that recent information determines the investors’decision; therefore, investors will expect inflation to be the same as the previous year (In John, In Makhija&In Ferris, 2015).
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.
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. 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)
1.2 STATEMENT OF RESEARCH PROBLEM
In the annals of the Nigerian Capital Market, year 2009 will remain indelible due to its dismal performance. The banking reforms, global financial meltdown, change of leadership of the Central Bank of Nigeria (CBN) and the Securities and Exchange Commission (SEC) policies and counter policies within and outside the market inter alia are some of the factors that would make 2009 not to be forgotten in a hurry by many investors and even market operators. These factors made the market to remain on a free-fall during the year under review. For investors in the market, it was an unpalatable year as by mid December 2009, average year-to-date return at the market stood at a negative of 35 per cent, an extension of the average drop of 46 per cent recorded in 2008. This implies that an average investor with portfolio spread across the market recorded more than 35 percent loss in its market value during the period. And for those that invested in financial stocks had an average of more than 44 percent; those in the insurance were the worst hit with an average loss of about 64 percent while petroleum stocks generally lost some 61 percent.
In 2008, a lot of companies came into the market to raise money and some promised to come and list. But up till now, they have not listed; that is to say, a lot of people’s money is locked up somewhere and they are not having real value for their money, that is number one. Two, when we had the market bubble, that really affected the performances of most of these companies in terms of giving good returns on investment to the stakeholders.”
In spite of the many weaknesses, there is silver linings for the market. But this can only be manifest when a concrete step is taken towards the reality of the take-off of market markets, the new rules on share buy back, reduction in costs of transactions, comprehensive periodic reporting requirements, publication of periodic forecasts of quoted companies, a strict regulatory surveillance by both NSE and SEC among others that would reinforce investors confidence in the market.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is to empirically study the relation between Nigeria securities exchange market and economic growth in Nigeria. Other objectives includes below:
⦁ Assess development levels of the Nigerian securities exchange market in the past thirteen years.
⦁ Find out the role of the Nigerian securities exchange market in accumulation of funds and development of the gross domestic product.
⦁ Find out ways in which the Nigerian securities exchange affects the Nigerian economy.
⦁ Recommend on appropriate and useful ways that can aid in improvement and efficiency of the Nigerian securities exchange market.
1.4 RESEARCH QUESTIONS
The following research questions will be imperative to the success of this study:
⦁ How does the adaptive expectation hypothesis affect the Nigerian securities exchange and economy?
⦁ What impact does the Nigerian securities exchange have on the Nigerian economy?
⦁ What is the relationship between the securities exchange and the adaptive expectation hypothesis?
⦁ How is the progress of the Nigerian securities exchange and economy from 1990 to 2015?
1.5 HYPOTHESES OF THE STUDY
A research hypothesis is a scientific statement expressing the relationship between two or more variables which is meant to be tested. In the light of the primary objective of this study, the following hypotheses have been formulated
1. H0: Securities exchange market; a test of adaptive expectation hypothesis has no significant relationship with economic growth in Nigeria.
H1: Securities exchange market; a test of adaptive expectation hypothesis has a significant relationship with economic growth in Nigeria.
1.5 SIGNIFICANCE OF THE STUDY
The Nigerian securities exchange is a market place but many people see it as complex due to its trading methods. From this perception, many perceive it to belong to the few literate. Due to this, the study will assist people in understanding the role and functions of the Nigerian securities exchange. It will further illustrate and bring out clearly the impact of the Nigerian securities exchange on the Nigerian economy. The study will also show the success and failure of the Nigerian securities exchange between the year 2000 and 2012. It will further show the problems the securities exchange faces in its daily activities (Olusegun, Oluwatoyin, Fagbeminiyi, 2011). In addition, investors largely rely on the history of the securities exchange to make their future decisions. Therefore, the study will be very important in explaining the adaptive expectation hypothesis and its impact on the Nigerian securities exchange and Nigerian economy. The study will also aim at enlightening the Nigerian investors on the behavior of the Nigerian securities exchange and the way they can utilize the adaptive expectation hypothesis to their advantage. Finally, the data and information collected will help in making recommendations to the investors, public, Nigerian securities exchange managers, security brokers, economy analysts, and future researchers (Ifionu, Omojefe, 2011).
1.6 SCOPE OF THE STUDY
In view of its primary objective, this study focuses mainly on the activities of the Nigerian securities exchange market without detailed reference to other markets in the capital market. The study covers activities of the Nigerian stock market for a period of 26 years, from 1990 to 2015. The choice of this period is anchored on the fact that it covers both the relatively small and high activities performance of the market.
1.7 LIMITATIONS OF THE STUDY
This research was limited by certain constraints which include difficulty in sourcing data from certain relevant organization, non availability of data on certain variables, restrictions on accessing certain materials on the internet and insufficient financial resources for the study.
Lastly, this study was also constrained by inadequate time on the part of the researcher, since attention had to be given to other course work.
1.8 DEFINITION OF TERMS
Investment: The act of buying of shares with the expectation of making profit.
Transparency: Extent to which, the trading information is available to the public.
Diversification: A way of reducing investment risk through increase in the number of securities
Broker: An organization or individual who handles the order of buying and selling of shares for a commission
Economic Growth: This refers to the increased over time of an economy’s capacity to produce those goods and services needed to improve the well-being of the citizens in increasing number and diversity. It is the study of the process by which productive capacity of the economy is increased over time to bring about rising level in national income.
Economic Development: This is a multi-dimensional process involving the provision of basic needs, acceleration of economic growth, reduction of inequality and unemployment, eradication of poverty as well as changes in attitude, constitution and structure in the economy.
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