This is the introductory chapter of the chapters. is briefly explains the background of the study, statement of the problem, objectives of the study, research questions, statement of hypothesis, significance of the study, scope of the study, limitations of the study and definition of terms.
1.1 Background Of The Study
The Capital market in any country is one of the major pillars of long-term economic growth and development. The market serves a broad range of clientele, including different levels of government, corporate bodies and individuals within and outside the country. Capital formation entails accumulated savings out of the current incomes of either organization or individual. It is investment in fixed assets which in part is financed with monies raised through the capital market (Al-Faki, 2006). The Capital market has been one of the major means through which foreign funds are injected into most economies and the tendency towards a global economy is more visible there than anywhere else. It is therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring the overall economic growth of a nation (Emenuga, 1998).
The development of the capital market has generated two major sets of economic benefits. First, it has improved the allocation of capital, because the prices of corporate debt and equity respond immediately to shifts in demand and supply, changes in the outlook for an industry (and/or company) are quickly embodied in current asset prices. The signal created by change in price of a security encourages investors as a result of higher prices or discourages them due to lower prices; this is because the investors often used the prices of securities to predict the likely trend of the market as either bullish or bearish. Businesses with high returns attract additional capital quickly and easily. When there is decline in demand, prices drop, and this signal makes investors to cut the flow of capital to the industry which leads to a decline in economic growth.
The ability of companies in their early stages of development to raise funds in the capital markets is also beneficial because it allows these companies to grow very quickly. This growth in turn results into general increase of output in the economy (Abdullahi, 2005). Although interest in identifying a formal link between financial system and economic growth is fundamental, the basic intuition behind this relation is relatively easy to surmise.
This is because of the fact that the main goal of the capital market is the channeling of funds from the surplus sector unit to the deficit sector unit of the economy. It plays a major task in human capital investments which are essential elements of economic growth and development. From this point of view, one should expect that as the capital market develops and deepens, then efficient allocation of the financial resources for the investment is facilitated and thus the frontier of production possibilities is increased (Adam & Sanni, 2005). Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments.
Financial markets play an important role in the mobilization of financial resources for long term investment through financial intermediation. The financial market, which comprises the capital and money markets as well as other submarkets, plays crucial roles in the functioning of any modern economy. However, for the purpose of this research work emphasis will be on the capital market. The capital market is believed to be an important sector of every economy whether it is developed or developing.
This is because of the fact that the capital market performs a vital role in the growth of the economy by providing the avenue through which foreign investors make investment in the country which in turn may boost the growth of the economy in terms of foreign Direct Investment (Daniel, 1999). The capital market mobilizes long-term debt and equity finance for investments in long-term assets. Capital markets also help in boosting the financial system as well as improving the economic growth of a country. The capital market supplements traditional lending activities of the financial institutions such as banks by providing risk capital (equity) and loan capital (debt). By means of these instruments, the market is able to mobilize long-term savings and provide capital to investors to finance long-term investments thereby broadening ownership of productive assets (Daniel, 2004). Dealers in the securities segment of the capital market include banking institutions, stockbrokers, investment and merchant bankers and venture capitalists that intermediate between the market and the public.
Well-functioning financial markets are very crucial for the promotion of global financial integration. An efficiently functioning domestic financial market can better position a country's competitiveness in the markets for global capital (Senbet & Otchere, 2005). Accessing global markets for capital, through a well-functioning financial system, lessens a country's reliance on foreign aid and other forms of external borrowing. It has been pointed out by a number of financial analysts that financial globalization allows for the sharing of local security risks.
Given the benefits associated with having well-functioning financial systems, a number of African countries have endeavored to put in place various measures aimed at developing the financial sector. Financial sector reforms have therefore been widely used as policy measures to encourage the development of domestic financial systems as well as the dismantling of barriers to international capital flows. African financial markets have been increasingly integrated with the other world capital markets. The encouraging drive towards globalizing capital flows in Africa has led to the growing relevance of emerging capital markets in the continent (Harris, 1997).
The impact of the capital market performance is determined by a number of elements, which include how financial assets are priced, such as the size of the stock market, market capitalization, number of listed equities, transactions in buying and selling of securities (liquidity) which in this case refers to the volume of transactions and new issues of securities. This study therefore poses to examine the impact of capital market performance on economic growth in Nigeria.
1.2 Statement Of The Problems
Nigerian capital market has undergone a series of reforms all with the hope of creating a stable economic growth and development. The most recent reform was carried out in order to provide opportunities for greater fund mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal. It is expected as a result of the reform the market can provides variety of financial instruments capable of enabling economic agents to pool, price and exchange risk. In spite of these vital roles that the reform is expected to play, there is however a great concern on the performance of the Nigerian capital market in relation to the economic growth and development which when viewed from the nature of activities taking place in the market appeared superficial. This may probably be attributed to lack of providing enabling framework that sustained confidence and investors' protection and also thorough evaluation of factors that are of significance relevance in determining capital market performance.
Although from economic perspective distinction exists between economic growth and development, most of the studies conducted in the area under study fail to take into consideration the difference and also the interrelationship between the two variables. This therefore triggers the need to investigate the situation bearing in mind the distinction and also appropriateness of the methodology under study. To the best of our knowledge, studies conducted in the area show mixed conflicting results and this could probably be attributed to failure to adopt appropriate methodology. Another issue of concern is most of the studies that evaluate capital market performance are either on data of primary market or secondary market and used to infer on the overall capital market performance but not on the combination of the two markets' data in aggregate. This informs the need to evaluate the market on aggregate data basis in order to ascertain how influential it is on the economic growth of Nigeria. combination of the two markets' data in aggregate. This informs the need to evaluate the market on aggregate data basis in order to ascertain how influential it is on the economic growth of Nigeria.
1.3 Objectives Of The Study
The main objective of the study is to examine the impact of capital market reforms and equity financing of business firms. However the specific objectives are to:
- Determine the impact of market capitalization on the Gross Domestic Product (GDP).
- Assess the effect of total new issues on the gross domestic product.
- Identify the contribution of the volume of transaction to the gross domestic product in Nigeria.
- Examine the impact of total listed equities stocks on the gross domestic product in Nigeria.
- The SEC engages with a multitude of stakeholders to inform and enhance regulatory activities domestically and internationally
1.4 Research Questions
Based on the broad statement of the problem the following research questions were raised:
- To what extent does market capitalization impact on gross domestic product?
- How does total new issues affect gross domestic product in Nigeria?
- To what extent does the volume of transaction in the capital market contribute to the Gross Domestic Product in Nigeria?
- To what extent does total listed equity in the capital market contribute to the Gross Domestic Product in Nigeria?
1.5 Hypothesis Of The Study
In line with the objectives of the study the following hypotheses have been formulated in null form:
H01: Market capitalization has no significant impact on Nigeria's gross domestic product.
HA: Market capitalization has no significant impact on Nigeria's gross domestic product
H02: Total new issues have no significant effect on Nigeria's gross domestic product.
HA: Total new issues have no significant effect on Nigeria's gross domestic product.
1.6 Significance Of The Study
It is a noted fact that for any meaningful economic transformation of a country to take place, the capital market must be effectively active. It has also been an acknowledged fact that the economic strength of any nation is measured according to how actively and effectively the capital market is performing (Adamu, 2008). The study will be of immense significance to regulatory authorities such as the CBN, NSE and SEC in coming up with sound financial policies and reforms that will boost the performance of the capital market. This would strengthen public companies by ensuring that corporate governance practices in Nigerian public companies are aligned with international best practices through improved financial disclosure of information and adoption of International Financial Report Standards. Finally, future studies may want to share this experience by extrapolating some of the data as well as the statistical inferences that this study has come up with.
1.7 Scope Of The Study
The Nigerian economy is a large component with a lot of diverse and sometimes complex parts. In this regard the study looks at a particular part of the economy by focusing particularly on the financial sector. Even then, the study does not cover all the parts of the financial sector, but focuses only on the capital market and its activities as such its impact on Nigerian economic growth. This is informed by the importance of the capital market to the economic development of the country because it provides long term funds needed for investment for the growth of the economy. The choice of the period of study is predicted on the reasoning that, the market has experienced remarkable developmental changes as well as improvement in the policy framework of the market. This is in terms of its operational activities, increase in the number of quoted companies and securities, as well as market capitalization. Although, new issues and volume of transactions have all recorded significant increase during the period of study but there have been records of downturn in some years as a result of the global financial crisis.
1.8 Limitation Of The Study
In carrying out research, the researcher encountered some constraints, which includes:
(1) Financial Constraints:
Generally, cost of living is high, researcher work like this one takes a lot of money to complete as a result for this particular study, the researcher did not find it easy since the financial involvement was much.
(2) Time Constraints:
As already mentioned, the research work was conducted along side other academic, activities as well as the researchers paid employment, therefore the allocation of time among the activities in order to achieve a balance between academic demands and office work was not easy
(3) Research Data Acquisition Constraints:
given the nature of the research work and data needed. It was not easy to acquire all the data needed. Many of the workers refused to release some of the data needed for fear of leaking classified information. This problem persisted in spite of fact that they were informed that the workers was only for academic purposes Eventually with some assistance, a number of the material needed was realized.
1.9 Definitions Of Terms
Some terms or concepts have various meanings depending on who or how it is used. The one in thus study are used in the following context.
It is used interchangeable with the capital market which is an integral part of the countries financial system where money securities are bought and sold.
A shareholder is one who holds a share certificate, who has a legal title to shares. It is also called or referred to as stock holder.
It is made up of a number of bonds, stocks or share selected from a list of various trades or business with their market price added together
It is the buying and selling of goods with the object of gaining from differences in prices.
One who speculates on the stock exchange by subscribing to a new issue with the hope of selling his allotment at a profit as dealings.
An individual who sells securities has does not own or which he does not want to deliver in the hope that they can be repurchased at a profit before delivery has to be made.
It is a term for equity or common stock.
An intermediary who buys or sells shares on behalf of a client.
They refer to various promissory documents adopted as evidence of claim in the market.
It is where securities are offered for sale in the public from the issuer for the first time.
It is where people or investors can buy or sell previously quoted securities and get their money back for alternative uses.