Capital Market and Economic Growth in Nigeria 1981 - 2010

BY SAMUEL UDEJI
CHAPTER ONE
INTRODUCTION TO THE STUDY
1.1 BACKGROUND OF THE STUDY
In this era of globalization, it has indeed become even more topical, for countries to
focus on and pursue policies that promote economic growth and development. It is for this
reason that in Nigeria, for example, we have had the Structural Adjustment Programme (SAP),
Vision 2010, Vision 2020, Millennium Development Goal (MDGs), National Economic
Empowerment Development Strategy (NEEDS), State Economic Empowerment Development
Strategy (SEEDS), and other development plans. The effective implementation of these
programmes depends on the availability of finance. Eigbe (2000) noted that finance is the life
blood of any enterprise.
Virtually all aspects of human Endeavour entail the use of money either self- generated or
borrowed. Money enhances capital accumulation with tremendous cyclical rebound on economic
growth. In capital market, the stock in trade is money which could be raised through various
instruments, under well governed rules and regulations, carefully administered and adhered to by
different institutions or market operators. It is true that the rate of economic growth of any nation
is inextricably linked to the sophistication of its financial market and specifically its capital
market efficiency. Equity markets in developing countries until the mid-1980s generally suffered
from the classical defects of bank dominated economies that are shortage of equity capital, lack
of liquidity, absence of foreign institutional investors, and lack of investor‟s confidence in the
stock market (Adebiyi, 2005). Financial market and its sub-unit, capital market are constituted
when ever participants, with the aid of infrastructures, technology and other devices to facilitate
the mobilization and channeling of funds into productive investment. The importance of capital
market lies in its financial intermediation capacity to link the deficit sector with the surplus

BY SAMUEL UDEJI
sector of the economy. The absence of such capacity robs the economy off investment and
production of goods and services for societal advancement. Funds could thereby be idle at one
end, while being sought at the other end in pursuit of socio-economic growth and development
(Akinbohungbe, 1996).
Universally, capital markets are primarily created to provide avenues for effective
mobilization of idle funds from surplus economic units and channeled into deficit units for long-
term investment purposes. There is no doubt that capital market can make a wealthy nation and
wealthy people. The suppliers of funds are basically individuals and corporate bodies as
government rarely supply funds to the market. The deficit units by contrast consist only of
corporate bodies and government. In other words, individuals (households) who are major
suppliers of funds to the market are absent in the category of fund users. This is because
conventionally, individuals cannot access the capital market for funds. Moreover, capital markets
through secondary arms provide opportunities for the purchase and sale of existing securities
among investors thereby encouraging the populace to invest in securities and fostering economic
growth.
The funding requirements of corporate bodies and governments are often colossal,
sometimes running into billions of naira. It is therefore, usually difficult for these bodies to meet
such funding requirements solely from internal sources, hence they often look up to the capital
market. This is because the capital market is the ideal source as it enables corporate entities and
government to pool monies from a large number of people and institutions. Thus the socio-
economic function of the capital market is well established.
The Nigeria capital market is categorized into primary and secondary markets. New
securities are issued in the primary market, and companies issuing these securities receive the

BY SAMUEL UDEJI
proceeds for the sale. The secondary market provides a forum for the sale of securities by one
investor to another investor. Thus, the efficient functioning of the market paves way for the
primary market by making investors more willing to purchase new securities in anticipation of
selling such in the secondary market. These securities are the major instrument used to raise
funds at the capital market.
The institutional framework through which the capital market function in Nigeria include;
the Nigerian securities and exchange commission (NSEC), the Nigerian stock exchange (NSE),
stock brokers and investors. The main objective of establishing the Nigerian capital market is to
mobilize savings from numerous economic units for economic growth and development, provide
adequate liquidity to investors, broaden the ownership base of assets as well as the creation of a
buoyant private sector, provide alternative source of funds for government, others are to
encourage more efficient allocation of new investments through the price mechanism, encourage
more efficient allocation of a given amount of tangible wealth through changes in the
composition and ownership of wealth, create a built-in efficiency in the operations and allocation
in the financial system to ensure optimal utilization of resources, and promote rapid capital
formation .
1.2 STATEMENT OF PROBLEM
The relationship between capital market and Economic growth can be viewed in two
folds: the impact of capital market on economic growth and impact of economic growth on the
capital market. Economists‟ views and opinions on this issue are divergent. There is abundant
evidence that most Nigerian businesses lack long-term capital. Some evidence from cross-
country studies supports the view that efficient financial intermediation is crucial to economic
development and positively influences growth (e.g., King and Levine 1993a and 1993b; Beck,

BY SAMUEL UDEJI
Levine and Loayza 2000; Levine, Loayza and Beck 2000). In the Lombard Street, published in
1873, Walter Bagehot argued that it was England‟s efficient capital markets that made the
industrial revolution possible.
Economic growth in a modern economy hinges on the financial sector that pools domestic
savings and mobilizes foreign capital for productive investments. Underdeveloped or poorly
functioning capital markets typically are illiquid and expensive which deters foreign investors.
Furthermore, illiquid and high transactions costs also hinder the capital raising efforts of lager
domestic enterprises and may push them to foreign markets. Recent theoretical literature on
financial development and growth identifies three fundamental channels through which capital
market and economic growth may be linked (Pagano, 1993): First, capital market development
increases the proportion of savings that is channelled to investments; Second, capital market
development may change the savings rate and hence, affect investments; Third, capital market
development increases the efficiency of capital allocation. In compliance to these channels,
introducing an efficient capital market to link between the net savers (households) and net
investors (entrepreneurs) results in reduction of transactions costs associated with channelling
savings, making the household savings highly liquid, enabling selection of efficient investments
by gathering information on investment returns efficiently, and providing markets for
diversification of risks by households and corporations. Thus, inability of investors to raise fund
in capital markets may reduce the incentive to enter new ventures, reducing overall long-term
productivity of the economy. On the other hand, an efficient capital market reduces the
transaction costs of trading the ownership of the physical assets and thereby paves the way for
the emergence of an optimal ownership structure. Thus, liquid capital markets provide avenues
for the effective utilization of funds for long-term investment purposes by mobilizing them from

BY SAMUEL UDEJI
the surplus spending economic units to the deficit spending economic units (Ekineh, 1996). In
short, an efficient capital market is essential for long-term growth in capital formation (Osaze,
2000). Ekundayo (2002) argues that a nation requires a lot of local and foreign investments to
attain sustainable economic growth and development. The capital market provides a means
through which this is made possible. In addition, capital markets provide the opportunities for the
purchase and sale of existing securities among investors thereby encouraging the populace to
invest in securities and fostering economic growth (Ewah, et al 2009). Hence, efficiently
functioning capital market affects liquidity, acquisition of information about firms, risk
diversification, savings mobilization and corporate control (Anyanwu 1998). Hence, by altering
the quality of these services, the functioning of capital markets can alter the rate of economic
growth (Equakun 2005). P K Mishra, Uma Sankar Mishra, Biswo Ranjan Mishra( India as a case
study 2010) stated that the capital market organization and regulations should focus on interest
rate fluctuations, information asymmetry and transaction cost such that large number of domestic
as well as foreign investors enters the market with huge listings, investments, and trading so that
the very objective of optimal allocation of economic resources for the sustainable growth of the
country can be ensured.
Most recent literatures on the Nigeria capital market have recognized the tremendous
performance the market has recorded in recent times. But only few of them paid attention to the
impact of interest rate on capital market and how does this impact (if there is) affect capital
market contribution to economic growth. Interest rate is the cost of borrowing or the price paid
for the rental of funds. Interest rates are important on a number of levels. On a personal level,
high interest rates could deter you from buying a house or a car because the cost of financing it
would be high. Conversely, high interest rates could encourage you to save because you can earn

BY SAMUEL UDEJI
more interest income by putting aside some of your earnings as savings. On a more general level,
interest rates have an impact on the overall health of the economy because they affect not only
consumers‟ willingness to spend or save but also businesses‟ investment decisions. High interest
rates, for example, might cause a corporation to postpone building a new plant that would ensure
more jobs (Mishkin, F. (2004) The Economics Of Money, Banking, And Financial Markets).
Because changes in interest rates have important effects on individuals, financial institutions,
businesses, and the overall economy, it is important to explain fluctuations in interest rates that
have been substantial over the past twenty years.
Therefore, this study seeks to answer the following questions: “What is the impact of
interest rate fluctuation on capital market?”; “If there is, to what extent does this affect capital
market contribution to economic to growth?”
1.3. OBJECTIVES OF THE STUDY
The broad objective of the study is to identify and establish the relationship between capital
market and economic growth.
The specific objectives of the study are to:
1. Examine the trend of capital market performance.
2. Examine the impact of capital market on economic growth.
1.4 JUSTIFICATION OF THE STUDY
Capital market offers access to a variety of financial instruments that enable economic
agents to pool price, and exchange risk. Through assets with attractive yields, liquidity and risk
characteristics, it encourages savings in financial form. This is very essential for government and

BY SAMUEL UDEJI
other institutions in need of long-term funds and for suppliers of long-term funds (Nwankwo,
1991).
Based on its importance in accelerating economic growth and development, government of
most nations tends to have keen interest in the performance of its capital market. The concern is
for sustained confidence in the market and for a strong investors protection arrangement. Nigeria
Securities and Exchange Commission (NSEC) is the government agency responsible for
developing and regulating the Nigeria capital market. It was created by Act No. 71 of 1979 and
re-acted as Securities and Exchange Commission Decree No. 29 of 1988. The NSEC purses its
objectives by registering all market operators based on capital adequacy, competence and
solvency as criteria.
Given the number of years, since the Nigerian capital market has been established and the
substantial financial resources available in the country, coupled with the existing institutions.
One can claim that the entire spectrum of the capital market has not been sufficiently active,
especially when compared with the capital unit of similar or lesser aged units in other developing
countries. This can be attributed to some inefficiency in the market such as:
1. High transaction cost
2. Lack of communication.
At the Nigerian stock exchange (NSE), buyers and sellers are the same people. So the
market is no more than a manipulative institution; where corruption and lack of transparency
have brought misery and poverty to investors. Or how could one describe a situation where
market crashed in 2008 with capitalization collapsing from N15 trillion to N6 trillion without
anybody lifting a finger? (Etubom; 2010). Because of this known deficiency, corruption has
permeated the system; there is price-fixing and overvaluation of shares. Initial Public Offers
(IPOs) are manipulated. Most executive and council members of the exchange stooped so low to

BY SAMUEL UDEJI
collaborate with stockbrokers by leaking information thereby manipulating prices of shares. It is
with this backdrop, that this paper attempts to examine the impact of capital market on the
economic growth in Nigeria.
Furthermore, the previous works have focused on average stock prices of companies quoted
in the respective country‟s stock exchange. This project would therefore improve on existing
knowledge by empirically analyzing the effects of changes interest rates on capital market
performance which would be proxied by market capitalization which measures both the prices
and volumes of all the stocks traded in the stock exchange of a particular country.
1.5. SCOPE OF THE STUDY
. This empirical investigation of the impact of capital market on economic growth in
Nigeria shall be restricted to the period 30years between 1981 and 2010 because this is a critical
period of the country in its quest for economic growth. The time span of 30 years is a long
enough time for empirically valid relationships to be established and this enables one to make a
generalization of the effects of capital market.
1.6. HYPOTHESES OF THE STUDY
For the purpose of this research, it is pertinent to make some hypotheses and postulations which
would generally give direction to the study and to arrive at valid, reliable and testable
conclusions. Therefore, the following null hypotheses are to be tested:
1. H0: Capital market has significant effect on Nigeria economic growth.
H1: Capital market has no significant effect on Nigeria economic growth.

BY SAMUEL UDEJI
1.7. RESEARCH METHODOLOGY
In this study, both descriptive and econometric methods of data analysis would be
adopted. The econometric methodology adopted is the multiple regression analysis with
Ordinary Least squares (OLS) econometric techniques.
1.8. ORGANIZATION OF THE STUDY
This research project consists of five (5) chapters in all. Chapter one gives a detailed
introduction and background to the study. This chapter consists of background of the study,
statement of the research problem, justification of the study, objectives of the study (general and
specific objectives), scope of the study, hypotheses postulated and research methodology.
Chapter Two gives a detailed analysis of all the literature reviewed and the various postulations
and positions as well as alternative theories concerning this topic. The themes method of
literature review is adopted in which the views that share the same idea are reviewed together
and those with opposing views are subsequently analyzed. The theoretical perspectives as well as
empirical evidence for the study are also done in this chapter. Chapter Three explores the
research methodology in detail, explains the techniques of data analysis adopted and specifies the
model which the research is based on. Chapter Four is where the data is analysed using multiple
regression analysis with Ordinary Least squares (OLS) econometric techniques to test the
hypotheses, to examine the impact of capital market on the economic growth and development in
Nigeria. Chapter Five concludes the study with summary, policy recommendations and
conclusion.

BY SAMUEL UDEJI
CHAPTER TWO
LITERATURE REVIEW
2.1 INTRODUCTION.
There have been the growing concerns and controversies on the role of the Stock markets
on economic growth and development (Oyejide 1994; Levine and Zervos 1996; Demirgue-kunt
and Levine 1996; Nyong 1997; Obadan 1998; Sule and Momoh 2009; Ewah,Esang and Bassey
2009).There have been mixed results; while some are in support of a positive link, some negative
link and others do not find any empirical evidence to support such conclusion. For instance, Atje
and Jovanovic (1993) found in a cross-country study of stock and economic growth of 40
countries from 1980 to 1988 that there was a significant correlation between the average
economic growth and stock market capitalization. Levine and Zervos (1996) examined whether
there was a strong empirical relationship between stock market development and long-run
economic growth. They found a strong correlation between overall stock market development
and long-run economic growth. Demiurgic-Kunt and Levine (1996) using data from 44 countries
for the period 1986 to 1993 found that different measures of stock exchange size are strongly
correlated to other indicators of activity levels of financial, banking, non-banking institutions as
well as to insurance companies and pension funds. They concluded that countries with well-
developed stock markets tend to also have well-developed financial intermediaries. Again,
Demiurgic-Kunt and Maksimovic (1998) have shown and re-emphasized the complementary role
of the stock market and banks that they were not rival or alternative institutions using 30
countries from 1980 to 1991. Pedro and Erwan (2004) are of the opinion that when the financial
market of a country is developed, output is raised as the capital used in production processes is
increased and put into best uses. Another argument has it that “the financial sector development

BY SAMUEL UDEJI
facilitates capital market development, and in turn raises real growth of the economy, Abdullahi
(2005). It was also observed by Tharawanji (2007) that countries with deeper capital market face
less severe business cycle output contraction and lower chances of an economic downturn
compared to those with less developed capital market. Further studies examined the impact of
the capital market on economic growth taking into consideration some key measures of the
market namely; stock market size, liquidity and integration with world market, subscribing to
this yet again were Levine and Zervos in a later research (i.e. 1998). Levine and Zervos (1998)
used pooled cross-country time series regression of 47 countries from 1976 to 1993 to evaluate
whether stock market liquidity is related to growth, capital accumulation and productivity. They
towed the line of Demiurgic- Kunt and Levine (1996) by conglomerating measures such as stock
market size, liquidity and integration with world market, into index of stock market
development. The rate of Gross Domestic Product (GDP) per capita was regressed on a variety
of variables designed to control for initial conditions, political instability, investment in human
capital and macro economic condition and then, included the conglomerated index of stock
market development. They found empirically that the measures of stock market liquidity were
strongly related to growth, capital accumulation and productivity while stock market size does
not seems to correlate to economic growth. Nyong (1997) developed an aggregate index of
capital market development and used it to determine its relationship with long-run economic
growth in Nigeria. The study employed a time series data from 1970 to 1994. Four measures of
capital market development-ratio of market capitalization to GDP (in %), ratio of total value of
transactions on the main stock exchange to GDP (in %), the value of equities transactions
relative to GDP and listing were used. The four measures were combined into one overall
composite index of capital market development using principal component analysis. The

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financial market depth was included as control. It was found that the capital market development
is negatively and significantly correlated with the long-run growth in Nigeria. Demiurgic-Kunt
and Maksimovic (1998) cited in Henry (2000) found a relationship between economic growth
and the stock market activity in the field of transmission of security (secondary market) more
than in funds channeling (primary market). Barlett (2000) demonstrated that a rising stock price
raises the wealth of the economy (wealth effect) by encouraging increase in consumers‟
consumption and increase in investment. Specifically, Bolbo et al (2005) indicated that
developments in the Egyptian capital market have indeed contributed in more ways to its
economic growth. A study in Belgium by Nieuwer et al (2005) on the long-term relationship
between economic growth and the development of the financial market, using new sets of stock
market indicators, found strong evidence that stock market development leads to economic
growth in Belgium. In Malaysia, it was reported that developments in the stock market cause
economic growth, the authors, Chee et al (2003) further indicated that a positive relationship
exists between the market and economic growth in the country. The same can be said of the
capital markets of Taiwan, Japan and Korea in the research of Liu and Hsu (2006), as it was
reported that developments in the stock market positively impacts the economic growth of the
said countries.
In Nigeria, authors have also attempted to establish a relationship between the capital
market and the country‟s economic growth. Some authors were considered in this study, with
each one taking into consideration various capital market variables, research techniques and
scope of study. Kolapo & Adaramola (2012) argued that there is a clear indication of a positive
impact of the capital market on the economic growth of country in their study from the period
1990-2010. Capital market variables such as market capitalization, total new issues, value of

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transactions and total listed equities and government stocks were considered with economic
growth measured by GDP figures. Research techniques used by the authors include Johansen co-
integration and Granger causality tests, with findings suggesting that a two-way causation exists
between the GDP and the value of transactions, and that a unidirectional causality exists from
market capitalization to GDP. Noted also was that no causality exists between the GDP and total
new shares as well as between GDP and total listed equities and government stocks. The authors
however reported in their study that there exists conflicting results as regards the subject matter
with some presenting a positive view, while some were in support of a negative link; others
simply gave conclusions based on neutral grounds. Of those arguing on positive grounds,
Osinubi and Amaghionnyediwe (2003) in their study, argued that a positive relationship exists
between the stock market and economic growth after examining the relationship between both
variables during the period 1980-2000 using ordinary least squares regression ( OLS). The
authors further suggest that policies geared toward rapid development of the stock market should
be in pursuit. The same grounds were equally held by Obamiro (2005) although suggestions laid
emphasis on government‟s creation of an enabling environment for better efficiency of the
market to attain higher economic growth. Adam & Sanni (2005) employing the error correction
approach was of the opinion that stock market development increases economic growth; a
unidirectional causality was again discovered by the authors from market capitalization to GDP
growth and a two-way causality between GDP growth and market turnover, using Granger
causality test and regression analysis. However, a few others greatly opposed the argument that
generally suggests a positive relationship between developments in the stock market and
economic growth. Specifically, Nyong (1997) was reported to have found that indeed, capital
market development is negatively correlated with long-run growth in Nigeria. Market

BY SAMUEL UDEJI
capitalization, value of transactions, value of equities and listings were among the capital market
variables used by the author, combining all four measures into one overall index of capital
market development using principal component analysis and of which time-series data from
1970-1994 was employed. A more recent study by Ewah et al (2009) in their appraisal of the
impact of the capital market efficiency on economic growth in Nigeria between the year 1961-
2004 argued that the capital market in the country has the potential to induce growth, market
capitalization, money supply, interest rate, total market transaction and government development
stocks constituted capital market variables used, with multiple regression and ordinary least
square estimation serving as research techniques. Further conclusion showed that the market
however has failed to contribute meaningfully to economic growth due to factors such as low
Market capitalization, low absorptive capacity, illiquidity, and misappropriation of funds among
others. In conclusion, Kolapo & Adaramola (2012) asserted that only market capitalization and
listed equities and government spending have a positive impact on economic growth while other
variables considered in their study such as total new issues were negatively related, implying an
insignificant impact on the economic growth of the country.
In another publication, a causality investigation was carried out by Riman, Esso & Eyo
(2008) on stock market performance and economic growth in the Nigeria using annual data from
1970-2004. The authors utilized the Johansson‟s Vector Error Correction Model (VECM) to
establish if a long-run relationship actually exists between stock market development and
economic growth in the country. They further argued that this relationship indeed exists,
establishing further, a unidirectional causality that runs from the stock market to economic
growth. The study also considered some authors and revealed that a bidirectional causality exist
between market performance and economic growth in some developing economies but that this

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was not evident in the Nigeria due to factors such as the low income level of majority of the
populace, their poor saving culture and insufficient number of listed companies on the floor of
the market. The need is felt to state here however that the authors also reported in their study that
a few authors in the literature questioned the contribution of the stock market liquidity to long-
term economic growth. Of such were Demirguc-Kunt and Levine (1996) who pointed out that
“stock liquidity may deter economic growth in that savings may be reduced by the stock market
through income and substitution effects, also which by reducing the uncertainty associated with
investment, greater stock market liquidity may reduce savings rate because of the effect of
uncertainty on savings, and lastly that stock market liquidity encourages investor‟s myopia,
adversely affecting corporate governance, thereby reducing the cross benefit from economic
growth.” Another author painted the negative effect of the capital market on economic growth
from a different perspective; there it was argued by Stieglitz (1985) that through frequent
instability and changes in equity prices, the stock market had the tendency to reveal vital
information and as such this only culminates to a free-rider problem that has the capability to
reduce investor‟s incentive, increase uncertainty and further expose market participants to high
costs of conducting research all in a bid to predict future market behavior. The initial study
however concluded that asides market capitalization, the Nigerian capital market may be
correlating with some other non-financial variables, exogenous to the market and capable of
affecting the liquidity of the market, though these variables that were deemed exogenous were
not mentioned in this study‟s opinion. Ewah, Esang & Bassey (2009) in their appraisal of the
impact of capital market efficiency on economic growth in Nigeria using time-series data from
1961-2004 reported that there exists a linkage between capital market efficiency and economic
growth, they further opined that the market possesses potentials for inducing economic growth,

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though no meaningful growth has been witnessed in the country. The study employed multiple
regression and ordinary least square estimation techniques and considered market variables such
as market capitalization, money supply, interest rate, total market transaction and government
development stocks, with empirical results showing that all variables satisfied the economic
apriori and are statistically significant with exceptions to total market transactions and money
supply. Another set of authors, Donwa & Odia (2010) in a bid to capture the impact of the
Nigerian capital market on her socio-economic development from 1981-2008, with measures
including market capitalization, total new issues, volume of transaction and total listed equities
and government stock, and using ordinary least square estimation technique found that the
capital market indices have no significant impact on the GDP (serving as a measure of socio-
economic development). The study further showed that value of transaction and market
capitalization had a positive but insignificant impact on GDP, whereas total new issues showed
no impact on GDP. The authors however advised that market capitalization be improved by
encouraging more participation on the part of foreign investors, as well as the need to restore
confidence in the market by regulatory authorities through transparency and fair trading
practices. Harris (1997) did not find hard evidence that stock market activity affects the level of
economic growth.
The stock exchange is the very hub of the capital market; the pivot, without this facility and
the chance, which is thus available to investors to liquidate their investments or adjust their
portfolio whenever they desire to do so, it is doubtful if there would be any motivation to invest
in securities. Most savers would then probably simply hold on to their funds in cash or bank
deposit which guarantees that they would be able to meet the fundamental purpose of the saving;
such motive is usually quite far from a desire to invest. Besides, there is a strong possibility that

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even where savings remain constant in aggregate terms, that without the safe-guard and the
guarantee of quality and the resultant confidence generated by stock exchange listing, most
savers could not be easily persuaded to place their money in securities, issued by firms whose
competence or integrity they could not trust. Savers would then probably put their money instead
in small, owner-managed business concerns. The implication of this for the entire economy
could be a serious handicap being placed on the promotion of large-scale enterprises and with
this, a severe limitation on the nation‟s production capacity. Because of the impact of scale on
cost of production, prices and loss of international competitiveness, the marketability of
securities, which the stock exchange impact on, therefore has extremely important implication
for the individual saver, the investor or fund user as well as the nation as a whole. This
tremendous impact that the capital market introduces to the capital formation and investment
process, ultimately to the promotion of individual and nation well-being and posterity, makes it
seem today a vital component of the total strategy for promoting national economic
development. It was probably because of these attractions that the emerging Nigerian nation in
1961 elected also for the establishment of stock exchange in Lagos. Whether that decision was
justified, the extent to which the institution may have fulfilled expectations will be closely
examined in appropriate portions of this study. The activities of the stock exchange fall into two
broad categories, the primary and secondary markets. The primary market is concerned with the
initial issuance of securities. Such an issue can take any of the following forms: offer for
subscription, offer for sales, by introduction, private placement and rights issue. The market for
outstanding securities (the secondary market as it is often called) enhances the new issues market
in many ways, by providing the means by which investors can monitor the value of their shares
and liquidate them when they so desire. The secondary market augment the supply of funds to

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the primary market stated somewhat differently. If there were no secondary market in which
investors could cash their investment in listed securities they choose, many investors may not
buy new issues in the first place. From the perspective of the overall economy, the secondary
market is particularly important, as it makes it possible for the economy to ensure long-term
commitments in real capital.
This relationship between financial development and economic growth can also be traced to
the work of Schumpter (1912) who argues that financial services are paramount in promoting
economic growth. In his view, production requires credit to materialize, and one “can only
become an entrepreneur by previously becoming a debtor …what (the entrepreneur) first wants
is credit. Before he requires any goods whatever, he requires purchasing power. He is the typical
debtor in capitalist society”. In this process, the banker is the key agent. Schumpter (1912) is
very explicit on this score, “The banker, therefore, is not so much primarily the middle man in
the commodity „purchasing power‟ as a producer of this commodity … He is the ephor of the
exchange economy”. Building on the work of Schumpter (1912), Mckinnon (1973) and Shaw
(1973) propounded the „financial liberalization‟ thesis, arguing that government restrictions on
the banking system restrain the quality and quantity of investment. More recently the
endogenous growth literature has suggested that financial intermediation has a positive effect on
steady-state growth (see Pagano, 1993), and that government intervention in the financial system
has a negative effect on the equilibrium growth rate (king and Levine, 1993a).
In contrast, Robinson (1952) argued that financial development follows growth, and
articulated this causality argument by suggesting that “where enterprise leads finance fellows”.
Robinson (1952) and other followers of Keynes (1936), would argue that although growth may
be constrained by credit creation in less developed financial systems, in more sophisticated

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system, finance is viewed as endogenous responding to demand requirements. This line of
arguments suggests that the more developed a financial system is, the higher the likelihood of
growth causing finance (Chick 1983). These controversies motivated further empirical studies to
deal with this causality relationship along three statements; (1) Financial deepening stimulates
economic growth; (2) Economic growth promotes the development of the financial system; (3) A
circular relationship that financial development and economic growth stimulate each other (bi-
directional relationship) (Arestis and Demetriaades, 1993).
2.2 Financial Development Promotes Economic Growth
A prominent line of research suggests that financial development has a causal influence on
economic growth. That is, creation and strengthening of financial institutions and markets could
increase the supply of financial services. The financial sector increases savings, and allocates
them to more productive investments. Thereby financial development can stimulate economic
growth (Schumpeter, 1912). Findings in Mckinnon (1973), Shaw (1973) also support this
hypothesis. Building on this seminal contribution, Gelb (1989), Ghani (1992), King and Levine
(1993a, b) show that measures of banking development are strongly correlated with economic
growth in a broad cross-section of countries. According to Ghani (1992), “A country which starts
with more developed financial system tends to grow faster because it is capable of improving the
efficiency of resource used”.
2.3 Economic Growth Promotes Financial Development
Some scholars postulate a causal relationship from economic growth to financial
development. In this view, financial development appears as a consequence of the overall
economic development. Continual economic expansion requires more financial services and new
instruments. The financial system adapts itself to the financing needs of the real sector and fits in

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with autonomous development. Therefore, this type of financial development plays a rather
passive role in the growth process. For example, Gurley and Shaw (1955) and Goldsmith (1969)
show that economic growth propels financial development. Robinson (1952) consequently states,
“It seems to be the case that where enterprise leads finance follows”. The same impulses within
an economy which sets enterprise on foot make owners of wealth venturesome, and when a
strong impulse to invest is fettered by lack of finance, devices are invented to release it…and
habit and institutions are developed.
2.4 The Reciprocal Relationship Theory
This third view stresses the reciprocal relationship between financial development and
economic growth. Economic growth makes the development of financial intermediation
profitable, and the establishment of an efficient financial system permits faster economic growth.
By specializing in fund pooling, risk diversification, liquidity management, project evaluation
and monitoring, the financial system improves the efficiency of capital allocation and increases
the productive capacity of the real sector. At the same time, the technological efficiency of the
financial sector increases with its size, because economics of scale and learning-by-doing effects
are present in financial intermediation activities. As a result, the real sector can exert a positive
externality on the financial sector through the volume of savings.
Thus, both the financial sector and the real sector seem to have a positive influence on each
other. Arestis and Demetriades (1993), argue that financial development and economic growth
positively influence each other in the process of development. According to them, the financial
sector and real sectors interact with each other during all stages of development. In other words,
there is at no stage only a one-way relationship between financial development and economic
growth occurred.

BY SAMUEL UDEJI
2.5. The Role of Government in the Capital Market
Ojo and Adewunmi (1981:52) discussed the activities of the government in the market.
They said that there are possible dangers posed by the predominant role of government securities
on the market, where the funds raised by the government is diverted to unproductive expenditure,
the potential contribution by the financial institution to economic growth is therefore reduced.
Also, the use of the stock market for the marketing of government securities and private
securities, to the detriment of private issues because of the privileged position of the government
in the market which occur whenever the government is threatened with the issue of private
securities that is likely to compete with their own is also unhealthy.
Similarly, certain budgetary measures and fiscal directive could be employed to ensure that the
bulk of the available funds are invested in government securities, thereby leaving very little for
investment in private securities. It should be noted that this has been the case in Nigeria, to some
extent, under the term on which government securities are issued through the market. However,
in favor of the important role which governments of many less developed countries have to play
in promoting the development of their countries, raising funds through the capital market might
be the method of mobilizing the necessary finance. This is important for development and device
to encourage more people to participate in the developmental process. In the budget speech by
the then minister of finance in 1963, Okotie Eboh said: “that there‟s at present no organized
capital or money market in Nigeria. Both are becoming more and more necessary to enable
Nigerian capital to be employed in the expansion of industries and in the developmental
programmes of the governments. The Central Bank of Nigeria (CBN) will actively help in
fostering the growth of these markets. Arrangements are far advanced for the floatation of an
international ban of 2 million pounds on behalf of the federal government. And these

BY SAMUEL UDEJI
arrangements will take full accord of the need to develop a local market in federal government
securities.” As it was envisaged by Okotie-Eboh, the Central Bank of Nigeria has played a vital
role in the management and marketing of government securities and underwrites when the
market becomes somewhat saturated; as a main holder of such securities until sold to the public.
The principal objective of the Central Bank of Nigeria include the promotion of Monetary
Stability and a sound financial structure in Nigeria and to monitor and control of the commercial
and merchant banks in the country.
The capital market in Nigeria serves as an economic indicates of performance of government.
The Central Bank of Nigeria‟s Act of 1958 provided directly and indirectly, regulation bearing
on the capital market. The Central Bank of Nigeria regulates the capital market in that only with
its permission can other banks invest, and controls the movement of securities inside and outside
the country. Through these exchange measures, therefore, the level of activities in the market is
regulated, controlled and maintained at a congenial level
2.6. THE ROLE OF CAPITAL MARKET
As the major source of appropriate long-term funds, the capital market is obviously
crucial to any nation‟s economic development. Specifically, the capital market facilitates
economic growth by, among other things, mobilizing savings from numerous economic units
such as governments, individuals and institutional investors for users such as governments and
the private sector. It also improves the efficiency of capital allocation through a competitive
pricing mechanism. Specifically, the capital market plays the following roles in the economy;
2.6.1. Raising Capital for Businesses: The capital market is unique and different from banks
because; it provides companies with the facilities to raise capital for expansion through selling of
shares to the investing public (Levine, 1991). Firms raise bonds and equity through the new issue

BY SAMUEL UDEJI
segment of the capital market. This helps in easing the financing constraints of firms, and equity
most importantly becomes a permanent capital, which enhance the production capacity of firms
in a country. Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or acquire other
necessary business assets. A takeover bid or a merger agreement through the capital market is
one of the simplest and most common ways for a company to grow by acquisition or fusion
(Yartey, 2006).
2.6.2. Savings Mobilizing: The capital market facilitate saving mobilization. Transactions cost
and asymmetric information (adverse selection and moral hazard) make the mobilization of
savings costly. For example, in the presence of asymmetric information, risk-averse agents do
not feel comfortable entrusting their savings to others. Because transactions and information
costs are associated with collecting saving from many disparate agents, Capital markets emerge
to ameliorate these frictions and ease savings mobilization (King and Levine, 1993a, b). Capital
markets that are more effective at pooling or mobilizing savings from several agents can have
strong positive effects on economic development by boosting capital formation and improving
resource allocation.
2.6.3 Information Acquisition and Resource Control: It is costly and difficult to evaluate firms,
managers, and market conditions. Savers shy away from investment activities where they have
unreliable information, which may negatively affect resource allocation. Instead of having each
potential investor seeking and paying for information, the capital market can do that. It is argue
that since many firms and entrepreneurs will solicit capital, markets that are better at selecting
the most promising firms and managers will induce a more efficient allocation of capital and
therefore foster growth. Capital markets may also have a positive effect on financial markets,

BY SAMUEL UDEJI
since it is easier for an agent who acquired information to disguise this private information and
profit from it (Ujunwa, 2008). Therefore, large liquid stock markets may stimulate the
acquisition of information, which in turn could improve resource allocation and hence growth.
2.6.4 Management Monitoring and Corporate Control: Capital markets may promote corporate
control. For instance, if public trading of shares in capital markets properly reflects information
about firms then owners can link managerial compensation to stock prices (Levine and Zervos,
1996). This helps align manager‟s interest with those of owners, Furthermore, if takeovers are
easier in a well-developed capital market and if managers of under-performing firms are fired
following takeovers, then better capital markets can promote better corporate control by easing
take-over of poorly managed firms. The threat of takeovers helps align managerial incentives
with those of the owners.
2.6.5 Corporate Governance: By having a wide and varied scope of owners, companies
generally tend to improve on their management standards and efficiency in order to satisfy the
demands of these shareholders and the more stringent rules for public corporations imposed by
public stock exchanges, and the government. Consequently, it is alleged that public companies
(companies that are owned by shareholders who are members of the general public and trade
shares on public exchanges) tends to have better management records than privately-held
companies (those companies where shares are not publicly traded, often owned by the company
founders and/or their families and heirs, or otherwise by a small group of investors). However,
some well-documented cases are known where it is alleged that there has been considerable
slippage in corporate governance on the part of some public companies (Levine, 1991).
2.6.6 Government Capital Raising for Development Projects: Governments at various levels may
decide to borrow money in order to finance infrastructure projects such as sewage and water

BY SAMUEL UDEJI
treatment plants or housing estates by selling another category of securities known as bonds.
These bonds can be raised through the Stock Exchange whereby members of the public buy
them, thus loaning money to the government. The issuance of such municipal bonds can obviate
the need to directly tax the citizens in order to finance development, although by securing such
bonds with the full faith and credit of the government instead of with collateral, the result is that
the government must tax the citizens or otherwise raise additional funds to make any regular
coupon payments and refund the principal when the bonds mature (Felagan, 1987). A good case
was the decision of the Federal Government of Nigeria to use the capital market in financing its
development plans in the 1960s, 1980s, 1990s and even recently (CBN, 2004).
2.7 Appraisal of the Capital Market in Nigeria
The capital market has opened the floodgate to relatively inexpensive fund surpassing the
possibility of self-financing available to indigenous enterprises. Such funds are usually used for
expansion of existing businesses or to cushion the effect of inflation so that businesses may
continue as going concerns. It also affords indigenous enterprises and entrepreneurs the
opportunity to be introduced into the economy in general through entry into the securities
market. This enables shares that have been privately held to be offered to the general market or
international market for inflow of foreign investment. The entering of an indigenous company
into the capital market enhance its prestige and reputation, especially its products and credit
worthiness in the eyes of the public as conferred upon it by the new status (Bayero, 1996).
The capital markets in Nigeria create a free entry and exist for investors. It is a known fact in
private company that it is not easy for an investor (shareholder) to withdraw capital invested
without upsetting the company capital structure. But for public quoted company, it does not work
like that. As long as an investor‟s broker can find a prospective investor to buy the clients‟ shares

BY SAMUEL UDEJI
the process is done. One of those important functions of the capital market is to encourage
indigenous enterprises to develop its peculiar technologies through accessibility to funds and
expertise through international connection. This it has achieved tremendously. Moreover, most
of the enterprises benefited from the implementation of the Nigeria Enterprises Promotion Acts
and the privatization policies through the market. Both policies promoted indigenous enterprises,
which are the main engine of economic growth and development in an economy. Despites the
capital market laudable performance and benefits, it is still beclouded with some weakness in
Nigeria. The bureaucratic system of the Securities and Exchange Commission is a hindrance to
smooth processing of application submitted to it. The private sector to which most enterprises
belong is not used to the “leap and tumble” system of the public sector, but operates by leaps and
bounds. The fee charged by the exchange are unreasonably high and constitute a great burden on
enterprises/companies for whose sake the Second tier Securities Market (SSM) was established
in 1985. If it is realized that the engine of economic growth and development in Nigeria rest in
this sector, which is endowed with the capacity to create jobs for the unemployed, then the
charges should be moderate and not appear to be punitive. Likewise the cost of hiring the
services of stock brokers, registrars and issuing houses in the capital market is getting higher
every now and then, but their efficiency is not commensurate to the high cost, this gives room for
complaints and mistrust. The imposition of all forms of taxes by the three tiers of government on
companies and businesses is especially discouraging, and add to the number of weakness that
undermine the capital market as the engine room and pivot for economic growth in Nigeria.
The Nigerian capital market has performed fairly despite the numerous challenges and
problems some of which include: the buy and hold attitude of Nigerians, massive ignorance of a
large population of the Nigerian public of the nature and benefits of the capital market, few

BY SAMUEL UDEJI
investment outlets in the market, lack of capital market friendly economic policies and political
instability, private sector led economy and less than full operation of recent developments like
the Automated Trading System (ATS), Central Securities Clearing System (CSC), On-line and
Remote Trading, Trade Alerts and Capital Trade Points of the Nigerian Stock Exchange.
2.8. CONCLUSION
After a thorough review of the literature, it is obvious that there is no consensus amongst
economists about the effects of capital market performance on economic growth. One thing
which is certain however is that capital market affect economic growth. This is very much the
reason why special attention is given to the market in any country of the world that aims to
achieve growth. The observations and conclusions tend to vary from region to region and from
country to country. Besides, economists are questioning the efficiency and effectiveness of
capital market performance, and its contribution to growth. This is one the objectives this
research work aim to address: to add to knowledge by bringing interest rate (within the stated
scope), and evaluate its effect on capital market.

BY SAMUEL UDEJI
CHAPTER THREE
RESEARCH METHODOLOGY
3.1. INTRODUCTION
This chapter explains the research methodology used to carry out this project. The chapter is
divided into the following sections: Empirical Model, theoretical framework, model specification
and identification restrictions, sources of data, description and measurement of variables, and
techniques for data analysis.
3.2. EMPIRICAL EVIDENCE
According to Bernanke (2003), understanding how monetary policy affects economic
activity remains one of the greatest challenges of academic and financial sector economists. An
important financial market that has been overlooked as a channel for a monetary transmission
mechanism is the stock market. While most economists agree that stock returns are related to real
economic activity, few have argued that stock returns play any role beyond serving as a measure
of expected future corporate profits. However, many economists are of the opinion that stock
market forms an important transmission path for monetary policy. There are two channels
through which stock prices respond to monetary news. The first and more traditional channel is
the interest rate channel that relates to economic activity primarily through consumption and
investment. This channel of monetary transmission relies on the effect of interest rate changes on
loan demand. A cut in the interest rates reduces the cost of borrowing for investment and leads to
an increase in economic activity.
Furthermore, hypothetically, the interest rate channel may lead to time variation in the
response of stock returns if the elasticity of investment borrowing varies over time or if the
intertemporal elasticity of substitution of consumption is cyclical. But, as Peersman and Smets

BY SAMUEL UDEJI
(2005) argue, there is no clear economic reason for the effects of the interest rate channel to vary
over the business cycle and no prediction regarding the direction of possible variation. Higher
interest rate ensuing from contractionary monetary policy usually negatively affects stock return
thereby reducing investment and Total Output. This is because higher interest rate reduces the
value of equity as stipulated by the dividend discount model, makes fixed income securities more
attractive as an alternative to holding stocks, may reduce the propensity of investors to borrow
and invest in stocks, and raises the cost of doing business and hence affects profit margin. On the
contrary, lower interest rates resulting from expansionary monetary policy boosts stock market,
investment and National output.
3.3. THEORETICAL FRAMEWORK
This section examines some theoretical works done on the issues of economic growth.
3.3.1 The Harrod-Domar Growth Model
The model gives insights into the dynamics of growth. It focus is on Incremental Capital Output
Ratio (ICOR), which is critical for estimating the level of investment that would sustain growth.
The use of ICOR for estimating investment outlay for a given level of output was inspired by
Harrod (1 939) and Domar (1 947). Although, their work was originally designed to establish the
condition for equilibrium growth, their equations have been manipulated for various alternative
uses.
How the Harrod-Domar Growth Model works
The basic model assumes that it is a closed economy and that there is no government, no
depreciation of existing capital so that all investment is net investment, and that all investment (I)
comes from savings (S).

BY SAMUEL UDEJI
Other assumptions are:
1. There is a relationship between the total capital stock, K, and total GDP, Y. It follows
that any net additions to the capital stock in the form of new investment will bring about
a corresponding increase in national output, GDP.
2. Also, that the national saving ratio, s, is a fixed proportion of national output.
3. And finally, that total new investment is determined by the level of total savings.
Therefore:
Savings, S, is some proportion, s, of national income, Y, such that
S = s (Y)
Investment, I, is defined as the change in capital stock, K, such that:
I = ∆K
Total capital stock, K, bears a direct relationship to total national output (or income), Y, as
expressed by the capital-output ratio, k, (new investment as a percentage of GDP) then:
K = kY or
K/Y = k or
∆K/∆Y = kor
∆K = k (∆Y)
Since total national saving, S, must equal total investment, I, then:
S = I
From above we know that:
S = s (Y)
and that I = ∆K and ∆K = k (∆Y), so
I = k (∆Y)

BY SAMUEL UDEJI
Therefore:
s (Y) = k (∆Y)
Now, divide both sides of the equation above first by Y and then by k,
we obtain the following equation:
s/k = ∆Y/Y
Note that ∆Y/Y is equal to the rate of growth of GDP (the
percentage change in GDP)
This gives us the Harrod-Domar Equation of economic development that states that:
The rate of growth of GDP (∆Y/Y) is determined jointly by the national saving ratio (usually
expressed as a percentage), s, and the national capital-output ratio (expressed as an integer), k.
Therefore:
1. The growth rate of national income is directly (positively) related to the savings ratio,
i.e., the more an economy is able to save – and therefore invest – out of a given GDP, the
greater will be the growth of that GDP.
2. The growth rate of national income is indirectly (negatively) related to the economy‟s
capital-output ratio, i.e., the higher is k, the lower will be the rate of GDP growth.
In order to grow, economies must save and invest a certain portion of their GDP.
The roles of financial institutions are critical in economic development as they engage in
facilitating reliable payments system, mobilising savings, allocating credit and risks (Haley and
Schel, 1973). Capital market institutions in particular are in position to encourage investment, as
investors are able to borrow funds and invest more than they would have done without such
institutions. The extent to which they do this have been discussed in the previous chapters of this
study. The institutions are thus able to pool savings and direct them into viable investment
outlets (Copeland and Weston, 1980).

BY SAMUEL UDEJI
3.3.2 An Endogeous Growth Model
In the mid-1980s, a group of growth theorists became increasingly dissatisfied with exogenous
factor determining the long-run growth. Before the growth theory proposed by: Phillipe, Aghion
and Peter Howitt (1992), there were other growth theories which thrived apart from that Harrod-
Domar. Solow growth theory was one of such theories which was then in vogue. The Solow
growth theory was also known as the exogenous theory because it professed technology as an
exogenous factor which determines growth. One of the basic assumptions of the Solow model is
the diminishing returns to labour and capital and constant returns to scale as well as competitive
market equilibrium and constant savings rate. However, what is crucial about the Solow model is
the fact that it explains the long run per capita growth by the rate of technological progress,
which comes from outside the model.
The endogenous growth theory or new growth theory was developed as a reaction to the
flaws of the neoclassical (exogenous) growth theory. Phillipe, Aghion and Peter Howitt (1992)
developed an endogenous growth model whereby vertical innovation is the underlying source of
growth. The model assumes that industrial innovations improve the quality of products and better
products renders previous ones obsolete. The expected growth rate of an economy is affected
directly by the amount of research spent directly in that economy. The equilibrium is determined
at a point where the amount of research in any period is de-pendant upon the expected amount of
research in the following period. There is a negative relationship between the current level of
research and the following period‟s level of research. That is, the amount of research in the
current period depends negatively upon amount of research in the next period. This occurs
because when new innovation takes place, the rents of research from the previous innovations
will render the products obsolete; this is why this model is referred as creative destruction. In this

BY SAMUEL UDEJI
model, growth is a result of technological progress, the ability to produce new goods more
efficiently than before.
An interesting question that may arise is how capital move from those industries with
well obsolete products to new industries. The answer to this question might be, through financial
markets. This is because financial markets improve the allocation of capital (Goldsmith 1969)
and financial systems help to reallocate capital. But the extent to which the financial
(Capital) market reallocate capital can be greatly influenced by interest rate fluctuations.
Therefore the level of financial development in a country is important, since it may serve as a
means of capital reallocation in an economy.
3.4. MODEL SPECIFICATION
Based on the above theoretical framework and empirical evidence, we specify our model.
To specify the model, we consider the variables of capital market performance which are the
exogenous variables or independent variables in this model and the variable representing
economic growth which is the endogenous variable or dependent variable. In this model, GDP is
proxy for economic growth while Capital Market is captured by: Market capitalization (MC)
Interest rate (IR), Value of transaction (V) and Number of deals (N).
Therefore, the functional relationship between the variables is expressed as follows:
GDPt=F(MCAPt,VODt,INTRt,NDt)
Where;
GDP = Gross domestic product
MCAP = Market Capitalization
INTR = Interest Rate
VOD = Value of Deal (transaction)

BY SAMUEL UDEJI
ND = Number of deals
Specifying it in econometric form:
Y= αO MCAPα1
INTRα2
VODα3
NDα4
By applying the Log estimation rule, the function can be written explicitly as
Log Yt = α0 + α1 Log MCAPt + α2 Log INTRt + α3 Log VODt + α4 LogNDt + Ut
Y = α0 + αI MCAP + α2 INTR + α3 VOD + α4 ND + Ut
Where;
Ao = Intercept
α1, α2, α3 and α4 are Estimating Parameters. The subscript “t” is used to indicate that all the
variables incorporated in the model are time series data
α1 = Impact of market capitalization
α2 = Impact of interest rate
α3 = Impact of value of transaction
α4 = Impact of number if deals
Ut = Error term.
3.5. SOURCES OF DATA, DESCRIPTION AND MEASUREMENT OF VARIABLES
3.5.1 SOURCES OF DATA
For the purpose of this research work, secondary data was collected and used. The data used
were obtained from the World Development Indicators, a publication of the World Bank (2011),
CBN Statistical bulletin, the data was gotten from the internet. The data collected covers the
period between 1990 and 2010.

BY SAMUEL UDEJI
3.5.2. DESCRIPTION AND MEASUREMENT OF VARIABLES
3.5.2.1 ECONOMIC GROWTH: Gross Domestic Product (GDP) is used as a proxy for
economic growth. Gross Domestic Product (GDP), is the totality of goods and services produced
in Nigeria without regards to weather income generated during the reference period accrues to or
are paid to nationals of foreign countries. GDP is an economic indicator which measures the
welfare and economic performance of a country.
3.5.2.1 CAPITAL MARKET: The performance of the capital market will be captured by:
Market Capitalization, Interest rate, Value of transaction and Number of Deals. Different
researchers have recognized this variables among wish are Sunday O. E. Ewah, Atim E. Esang &
Jude U. Bassey (2009), J. A. BABALOLA AND M.A. ADEGBITE, Ujunwa Augustine (2010),
P K Mishra and Uma Sankar Mishra (2010). Many other economists believe that other factors
affect Capital market performance such as investors‟ confidence, fiscal policy amongst many
others.
Market Capitalization: Market capitalization (also known as market value) is the share price
times the number of shares outstanding or issued. It is the market value of a company‟s issued
shares. Market capitalization is the total value of all equity securities listed on a stock exchange.
It is a function of the prevailing market price of quoted equities and the size of their issued and
paid up capital. Listed domestic companies are the domestically incorporated companies listed
on the country's stock exchanges at the end of the year. Listed companies do not include
investment companies, mutual funds, or other collective investment vehicles.
Number of deals: This implies it refers to the total transactions that took place in the capital
market at a given period.

BY SAMUEL UDEJI
Interest Rate: Lending interest rate is the rate charged by banks on loans to prime customers.
This variable is measured in percentage and is taken as a proxy for nominal interest because it
measures the condition of credit in the economy and takes into account central bank‟s discount
rate and bank‟s profit margin. A low lending rate means credit and funds are easy to obtain while
a high lending rate means funds are difficult to obtain. The former is an indication of
expansionary policy while the latter is an indication of contractionary monetary policy.
3.6. TECHNIQUES OF ANALYSIS AND ESTIMATION
This research work shall make use of descriptive and econometric techniques of analysis. The
descriptive techniques are carried out using tables. The tables would clearly present the data and
thus enhance comparison of the variables in the study. The Ordinary Least Square regression will
be used for analysis and the package used for this study is Econometric view (E-View) package.
Both the qualitative and the quantitative techniques will be used to establish the theoretical,
empirical and methodological relationship among the variables. E-view will be used to estimate
the parameters of the model and to also assess their statistical reliability.

BY SAMUEL UDEJI
CHAPTER FOUR
ANALYSIS OF DATA AND INTERPRETAION OF RESULTS
4.1 INTRODUCTION:
This chapter is designed for the analysis of data and discussion of findings from this
study. Thorough and empirical justifications will be made from the results obtained from this
analysis without losing sight of theory. This section begins by the descriptive analysis of the
trend of capital market as captured by market capitalization, and followed by its impact on the
growth of the economy, the trend Real GDP and interest rate will also be shown using the
graphs, and followed by summary statistics, correction and lastly, the regression analysis.
4.2. DESCRIPTIVE ANALYSIS OF VARIABLES
Here, tables and graphs of the variables are presented and explained. This revealed the
trend and the fluctuations in the variables over time at a cursory glance. The variables examined
are: Market capitalization, real GDP, and interest rate with data from1981-2010
4.2.1 THE TREND OF MARKET CAPITALIZATION (1981-2010)

BY SAMUEL UDEJI
The graph above depicts the trend analysis of the performance of the market
capitalization as an important indicator/ variable of the capital market. Market capitalization has
grown substantially both in terms of values and growth rates. It grew significantly and
consistently from 5.23 billion to 3099.92billion over the 1980-1985 and 2001-2007. Similarly, in
relation to growth trends, market capitalization has maintained very high growth rate over period
1980-2007. There was monumental increase in the growth rate from 106.1 percent to as high as
870.9 per cent between 1986-1990 and 2001-2007 respectively. However, when the variable was
adjusted for inflation, similar trend were recorded. Also, the market capitalization ratio which
measure stock market size has been relatively stable and was in fact remarkable over the period
2001-2007. This can be partly explained by the sustained increase in the number of listed
companies by 46.8 percent after the reform and more generally by the remarkable appreciation in
share prices reflecting enhanced productivity of capital and resulting returns. Thus, compared to
the period before the reforms (1980-1985), the stock market using the market capitalization
suggests an improved performance after the reforms. Specifically, it has increased significantly
0
1
2
3
4
5
6
7
8
9
10
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
FIGURE 1: LMCAP
LMCAP

BY SAMUEL UDEJI
after the financial restructuring. If the trend continues, it signals a rapid development and
phenomenal growth of the market in the future.
Between 2006 and 2008, the global economy witnessed a serious economic crisis and
Nigeria was not spared. The crisis has injected into the economy both through financial channel
and real sector channel. This weakened the performance of capital market and could therefore be
said to be an important factor in dismal performance of the market capitalization.
On the other hand, banking sector, prior to this period has been characterized with series
of insider abuses such as non performing loans, toxic loan and soft loans. All these abuses further
threatened the performance of the capital market. The banking sector, witnessed a series of
reforms to sanitize the system and protect the innocent depositors. These reforms could be
associated to slight improvement in the capital market in recent periods as shown by the recent
upward trend in market capitalization. In conclusion, we can say that market capitalization has
upward trend.
4.2.2. THE TREND OF REAL GDP (1981-2010)
11
11.5
12
12.5
13
13.5
14
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
FIGURE 2: LRGDP
LRGDP

BY SAMUEL UDEJI
It can be observed from graph above that the trend of real GDP has been both upward,
though falls in some periods. There was a sharp increase in the growth rate of GDP of 550.53%
in 1981. However, on the overall, the trend has been upward with the exception of periods
1982,1983 and 1984 with a percentage decline in real GDP of 2.7%, 7.05% and 1.01%
respectively. Between 1991 and 1993, there was a relatively constant growth in Real GDP, this
was followed by a continous increase in the growth.
4.2.2. THE TREND OF INTEREST RATE (1981-2010)
FIGURE 3
It can be easily seen from the graph above that there has been great fluctuation. There
was a sharp rise in 1981 and a constant increase of 9.75% in 1984 and 1985. There was also a
sharp fall between 1989 and 1991 followed by a rise. From 1994 -2001, there is relatively but
continuous fall and in 2002 there was also another rise which was followed by a continuous fall.
0.00
5.00
10.00
15.00
20.00
25.00
30.00
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
INTEREST RATE
INTEREST RATE

BY SAMUEL UDEJI
4.3. PRESENTATION AND INTERPRETATION OF RESULTS
4.3.1 : SUMMARY STATISTICS
TABLE 1
LRGDP LVOD LMCAP INTR LND
MEAN
359350.4 535212.5 1825.330 12.78233 183954.0
MEDIAN
287576.4 63802.00 221.5000 12.21500 4409.200
MAXIMUM
775525.7 3535631. 13294.60 23.99000 1679144.
MINIMUM
183563.0 10014.00 5.000000 5.670000 215.0000
STD. DEV.
175803.2 877387.9 3516.461 4.985309 391102.6
SKEWNESS
1.029135 2.021483 2.075288 0.780090 2.529850
KURTOSIS 2.751382 6.453474 6.116372 2.727384 8.944482
JARQUE-BERA 5.372859 35.34007 33.67381 3.135599 76.17180
PROB. 0.068124 0.000000 0.000000 0.208503 0.000000
SUM 10780511 16056376 54759.90 383.4700 5518619
SUM SQ. DEV 8.96E+11 2.23E+13 3.59E+08 720.7459 4.44E+12
OBSERVATION 30 30 30 30 30
All observations are 30. The mean value for Real GDP is 359350, median of 287576 and
standard deviation is 175803.2. For market captilization, the mean is 1825.330, median is
221.550 and standard deviation is 3516.461.Among all the variables, interest rate has the least

BY SAMUEL UDEJI
values for mean, median and standard deviation which are 12.21500, 23.99000, 5.670000
respectively.
4.3.2. CORRELATION OF VARIABLES
TABLE 2
LRGDP LVOD LMCAP INTR LND
LRGDP 1.000000 0.884101 0.867705 -0.232402 0.811104
LVOD 0.884101 1.000000 0.942348 -0.277367 0.984048
LMCAP 0.867705 0.942348 1.000000 -0.326322 0.926796
INTR -0.232402 -0.277367 -0.326322 1.000000 -0.256315
LND 0.811104 0.984048 0.926796 -0.256315 1.000000
From the correlation result, all the varaiables except interest rate have positive and strong
correlation with Real GDP. The correlation of value of deal (LVOD) is 0.884101 or 88%, market
capitalization (LMCAP) correction is 0.867705 or 86%, number of deals (ND) is 0.811104 or
81% while interest rate (INTR) is -0.232402 or -23%.
Market capitalization, number of deals and value of deals all has positive and strong
correlation between them while interest rate has a negative and weak correlation with market
capitalization, value of deals and number of deals. The correlation suggests no multicorrelation
and therefore, our variables are suitable for regression analyysis.
4.3.3. PROPERTIES OF THE VARIABLES.

BY SAMUEL UDEJI
The reliabilty tests that will be performed in this study is unit root. The essence of these
reliability tests is to ensure that the time series variables that will be used in the our analysis are
stable for robust estimates. It has often been argued that macroeconomic data is characterized by
stochastic trend, and if untreated, the statistical behaviour of the estimators is influenced by such
trend. The treatment which involves differencing the data to determine the level of stationarity, is
carried out in this study using the Augmented Dickey Fuller (ADF) test and Phillip Perron (PP).
The table below presents the results of the unit root test.
The hypothesis is:
H0: δ=0 (unit root exists or data are non-stationary)
H1: δ≠0 (unit root does not exist of the data are stationary)
Decision rule:
If t* > ADF critical value, ==> accept null hypothesis and conclude that unit root exists.
If t* < ADF critical value, ==> reject null hypothesis, conclude that unit root does not exist.
TABLE 3: UNIT ROOT TEST

BY SAMUEL UDEJI
VARIABLE LEVEL 1ST
DIFF 2ND
DIFF SUMMARY
ADF PP ADF PP ADF PP
RGDP 2.0371 5.5116 -1.7990 -1.5610 -7.0373 -7.0281 I(0)
INTR -2.0755 -2.1232 -5.6269 -5.6270 -7.8685 -16.6338 I(1)
MCAP 2.3984 -0.4485 -0.1546 -5.5850 0.7083 -14.4246 I(1)
ND 10.0097 -1.4216 0.6561 -6.6534 0.1203 -11.5488 I(0)
VOD 7.8125 0.8786 4.5404 -5.9582 2.8948 -13.1965 I(0)
SOURCE: Computed by the autor.
t-critical : 1% = -3.68, 5% = -2.97 and 10%= -2.63
The results show that real GDP, number of deals (ND) and value of deals (VOD) are
stationary at level. While Interest rate (INTR) and market capitalization (MCAP) are stationary
at lst difference.
Therefore, our regression analysis will be on the average of the above stationarity; that is,
at level I(0).
4.3.4 INTERPRETATION OF THE REGRESSION RESULTS.

BY SAMUEL UDEJI
Dependent Variable: LRGDP
Method: Least Squares
Date: 02/13/13 Time: 04:07
Sample: 1981 2010
Included observations: 30
Variable CoefficientStd. Error t-Statistic Prob.
LVOD 0.489886 0.077634 6.310165 0.0000
LMCAP 17.08504 9.361306 1.825070 0.0800
INTR 2540.165 2310.741 1.099286 0.2821
LND -0.850938 0.155796 -5.461878 0.0000
C 190035.5 35187.22 5.400695 0.0000
R-squared 0.905863 Mean dependent var 359350.4
Adjusted R-squared 0.890801 S.D. dependent var 175803.2
S.E. of regression 58094.74 Akaike info criterion 24.92855
Sum squared resid 8.44E+10 Schwarz criterion 25.16208
Log likelihood -368.9282 Hannan-Quinn criter. 25.00326
F-statistic 60.14234 Durbin-Watson stat 1.228640
Prob(F-statistic) 0.000000
The regression result above shows that the five variables treated in the model all have
positive and significant influence on the real GDP except number of deals within the sample

BY SAMUEL UDEJI
frame of the study. The variables are market capitalization, interest rate, number of deals and
value of deals were all found to have significant influence on the real GDP.
The regression coefficient of market capitalization is found to be 17.08504 and is found
to be statistically significant at 10%. In other words, a unit increase in market capitalization as a
measure value of the traded share will impact positively on economic growth and the impact is
found to be significant at 10%, other things being equal.
The regression coefficient of the interest rate is 2540.165. Put differently, the partial
elasticity of the GDP, with respect to the interest rate is 2540.165 and is however found not to be
statistically significant. It is positive and hence, against the theoretical expectations that interest
rate is negatively related to market capitalization and Real GDP. This can be attributed to growth
in foreign investment and what keynes called “Animal Spirit.”
Also, as regards the number of deals, the regression coefficient is found to be -0.850938
but is significant statistically, other things being equal. In a more general term, a unit increase in
number of deals if found to impact negatively on growth of the economy. However, the impact is
found to be significant.
Also, the value of deals has a coefficient of 0.489886. It has positive impact and the
impact is found to be significant. Put differently, a unite increase in the value of deals will lead to
rise in growth of the economy other things being equal.
The overall measure of fit is captured by the co-efficient of determination, R2
and the
adjusted co-efficient of determination Ṝ2. Ṝ2
measures the share of the variation of real GDP
around its mean that is explained by the regression equation, adjusted for degrees of freedom.

BY SAMUEL UDEJI
The value of R2
which equals 0.905863 implies. Therefore, 90% variation in growth of the
economy could be explained by the independent variables put together as suggested by R-
Squared ceteris paribus. And that the remaining 10% is as a result of other stochastic influences
(like random chance influences, possible omitted variables, or any other stochastic disturbance).
Durbin-Watson stat: The Durbin Watson statistic is used to determine if there is first-
order serial correlation in the error term of an equation by examining the residuals of the
estimation .Since the regression model includes an intercept term and does not include a lagged
dependent variable as an independent variable then the Durbin-Watson stat can be adopted . The
conventional rule is that when:
1. DW =0, there is extreme positive serial correlation.
2. DW≈4, there is extreme negative serial correlation
3. DW≈2, there is no serial correlation.
Durbin Watson statistics is 1.228640. The f-statistic which shows the overall significance of the
variable is given by 60.14234.
4.4 DISCUSSION OF THE RESULT
As mentioned earlier, market capitalization which measures the size or value of
transaction in capital market is found to have positive and significant impact on economic
growth. This is theoretically expected; as the size of capital market grows, the economy is
expected to grow. This is line with some already conducted studies in the literature. Most studies
in the literature found the positive impacts of market capitalization on the economic
performance. Maksimofic (1998), Henry (2000), Bolbo etal (2005), Chee etal (2003) Lin and

BY SAMUEL UDEJI
Hsu.(2006), Kolapo and Adewole (2012), all established the positive relationship between
market capitalization and economic growth.
Number of deals traded is also found to have negative impact on economic growth,
though the impact has been found to be insignificant. This is however not in line with the
theoretical expectation. The observed result can however be associated with inflationary level in
the economy and several unethical practices in the stock market. These practices include insider
abuses, granting of toxic loans, non-performing loans, soft loan and weak corporate governance.
The value of deals has positive impact on economic growth. This in line with existing studies in
the literature and conform to the theoretical expectation. Studies like Nyong (1997), Ewahetal
(2009) established similar positions. Odiah (2010) established a different position and argued
that value of deals had no significant impact on economic growth. This is in line with the finding
of this study as value of deals has significant impact on growth of the economy. H0: Capital
market has significant effect on Nigeria economic growth is therefore accepted.

BY SAMUEL UDEJI
CHAPTER FIVE
SUMMARY, RECOMMENDATION AND CONCLUSION
5.1. SUMMARY
The study examined the impact of capital market on economic growth in Nigeria. The
study makes use of time series data from 1981-2010 obtained from central bank of Nigeria. The
first objective of the study was achieved using descriptive and graphical analysis. Based on the
trend analysis, Market capitalization has grown substantially both in terms of values and growth
rates but also record downfalls in some years especially in 2006 and2008. Real GDP on the other
hand experience sharp increase in the growth rate of GDP of 550.53% in 1981. However, on the
overall, the trend has been upward with the exception of periods 1982,1983 and 1984 with a
percentage decline in real GDP of 2.7%, 7.05% and 1.01% respectively. Between 1991 and
1993, there was a relatively constant growth in Real GDP, this was followed by a continous
increase in the growth. The second objective was achieved using ordinary leads square (OLS).
Before estimation, stationary properties of our variables were examined using the Augmented
Dickey Fuller (ADF) test and Phillip Perron (PP).The unit root test performed on the data
showed presence of non-stationarity of market capitalization based on Augmented Dickey Fuller
(ADF) but stationary at 1st difference using Phillip Perron (PP). Real GDP, number of deals and
value of deals are all stationary at levels and interest rate is stationary at 1st
difference using the
Augmented Dickey Fuller (ADF) test.
The following are empirical finding of the study:
1. The regression coefficient of market capitalization is found to be 17.08504 and is found
to be statistically significant at 10%. In other words, a unit increase in market

BY SAMUEL UDEJI
capitalization as a measure value of the traded share will impact positively on economic
growth and the impact is found to be significant at 10%, other things being equal.
2. The regression coefficient of the interest rate is 2540.165. Put differently, the partial
elasticity of the GDP, with respect to the interest rate is 2540.165 and is however found
not to be statistically significant. It is positive and hence, against the theoretical
expectations that interest rate is negatively related to market capitalization and Real GDP.
This can be attributed to growth in foreign investment and what keynes called “Animal
Spirit.”
3. The value of deals has a coefficient of 0.489886. It has positive impact and the impact is
found to be significant. Put differently, a unite increase in the value of deals will lead to
rise in growth of the economy other things being equal.
4. The number of deals has a negative coefficient of -0.850938; a unit increase in number of
deals will reduce economic growth by 0.85%, ceteris paribus.
5.1 POLICY RECOMMENDATION
Based on the empirical findings of the study, the following policy recommendations can
be made;
 Monetary authority should strengthen her efforts in a bid to stabilize the interest rate in
the country. As instability in interest rate will hamper the effective allocation of capital in
capital market and hence slow down the pace of economic growth of a country.
 More measures should be put in place by monetary authorities in order to sanitize the
capital market. It is evident that market capitalization impact positively on economic

BY SAMUEL UDEJI
growth and the impact in trend to be very significant. Consequently, volatility or
instability should be understood in order to further enhance the growth of the economy.
 Central banks also need to recognize their limitations and not attempt to do too much so
as not to overheat the economy and worsen it. There is a limit to which monetary policy
can be effective in affecting stock market performance and beyond this limit, any attempt
to further use monetary policy to influence stock markets would be ineffective at best or
harmful in adverse circumstances.
 Cecchetti, Genberg, Lipsky and Wadhwami (2000) argue that central bankers can
improve economic performance by paying attention to asset prices. The capital market is
one of the most important financial institutions operating in an economy and this makes it
very necessary for the apex regulatory financial institution to monitor its activities in
order to achieve stability and maintain development over the long run.
 Government in conjunction with anti-corrupt agencies like ICPC and EFCC should
ensure that all the perpetrators of illegal practices in capital market especially in the
banking sector are brought to book. This is important to prevent future occurrence and
crisis in the market.
5.3. CONCLUSION
So far, the study has examined the impact of capital market on economic growth
in Nigeria. The overall picture that emerges from the study is that capital market
variables are and hence could be manipulated to enhance the growth of the economy.
More specifically, market capitalization which captures capital market, impact
significantly on growth. Based on the proceeding analysis, there is a strong conviction
that the Nigerian Capital Market constitutes an indispensable functional intermediary in

BY SAMUEL UDEJI
the Nigerian financial system. There is also no doubt that it is capable of giving access to
substantially more funds if the appropriate measures are taken to eliminate the identified
problems.
Hence, the study recommends measures to prevent practices that could distort or
give wrong signals about capital market to the public should be strengthened by
government and appropriate monetary Authorities.

BY SAMUEL UDEJI
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BY SAMUEL UDEJI
Appendix 1:
TABLE 4: Time Series Regression Data 1981-2010
YEAR
REAL GDP
(N’MILLION)
NUMBER
OF DEAL
VALUE OF
DEAL
(N’MILLION)
INTEREST
RATE
(%)
MARKET
CAPITALIZATION
(N’BILLION)
1981 205222.06 302.8 10199 6.25 5.0
1982 199685.25 215 10014 7.75 5.0
1983 185598.14 397.9 11925 7.75 5.7
1984 183562.95 256.5 17444 9.75 5.5
1985 201036.27 316.6 23571 9.75 6.6
1986 205971.44 497.9 27718 9.75 6.8
1987 204806.64 382.4 20525 15.10 8.2
1988 219875.63 850.3 21560 13.70 10.0
1989 236729.58 610.3 33444 21.40 12.8
1990 267549.99 225.4 39270 22.10 16.3
1991 265379.14 242.1 41770 20.10 23.1
1992 271365.52 491.7 49029 22.10 31.2
1993 274833.29 804.4 40398 23.99 47.5
1994 275450.56 985.9 42074 15.00 66.3
1995 281407.4 1838.8 49515 13.96 180.4
1996 293745.38 6979.6 78089 13.43 285.8
1997 302022.48 10330.5 84935 7.67 281.9
1998 310890.05 13571.1 123509 9.98 262.6
1999 312183.48 14072 256523 12.59 300.0
2000 329178.74 28153.1 426163 10.67 472.3
2001 356994.26 57683.8 426163 9.98 662.5
2002 433203.51 59406.7 451850 16.50 764.9
2003 477532.98 120402.6 621717 13.04 1,359.3
2004 527576.04 225820 973526 13.32 2,112.5
2005 561931.39 262935.8 1021996.6 10.82 2,900.1
2006 595821.61 470253.4 1337954 8.35 5,121.0
2007 634251.14 1076020.4 2615020 8.10 13,294.6
2008 672202.55 1679143.7 3535631 11.84 9,563.0
2009 718977.33 685717.3 1739365 13.27 7,030.8
2010 775525.7 799710.9 1,925,478.0 5.67 9,918.2
SOURCE: CBN, WORLD BANK.

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