CHAPTER ONE

INTRODUCTION

1. BACKGROUND OF THE STUDY

The achievement of a high sustainable level of economic growth and development has been the main objective of many countries, most especially after the publication of the famous book “an enquiry into the nature and causes of wealth of a nation” by Smith (2016). The search for ways to improve the level of economic growth has encouraged researchers to develop different models and theories in a bid to explain the phenomenon of economic growth. Economists traditionally have looked at factors such as capital, labour and technology as the only factors which matter to the process of economic growth. Mckinnon and Shaw (2017), King and Levine (2019), Beck, Levine and Loayza (2020) among others have argued that stock market development spurs economic growth. On the other hand, Bossone (2020), and Tsuru (2020), Levine (2017) and Gertler (2018) stressed that economic growth can be affected by functions exercised by stock market such as mobilising capital, assisting in the allocation of resources, monitoring managers, and facilitating risk management.

However, with recent developments in the economic growth theory, there has been a shift in the focus of growth literature from the traditional factors (capital, labour and technology) to other factors that might also contribute to the growth process. These other factors include financial and stock market development, macroeconomic environment, political stability and foreign direct investment (FDI), among others. Stock market development provides a platform that helps in improving the allocation of capital and thus enhancing the prospects of long-term economic growth. A liquid stock market development offers the potential for investors to quickly and cheaply alter their portfolios thereby reducing the riskiness of their investment, thus, facilitating investments in projects that are more profitable (Ezeabisili & Alajekwe, 2017). Without a liquid stock market, many profitable long-term investments would not be undertaken because savers would be reluctant to tie up their investments for long periods of time (Okonkwo, Ogwuru & Ajudua, 2015).

The stock market is an organized market where brokers meet to buy and sell stocks and shares. The stock market or equity or capital market is a public market (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of company stock and derivatives at an agreed price, there are securities listed on a stock exchange as well as those only traded privately. The stock market is the aspect of the financial system which mobilizes and channels long term funds for economic growth. According to the Stock Market Investing Guide (2017), the irony of stock market is that companies live and die by their stock price, yet for the most part they don't actively participate in investing and in trading their stocks within the market.

Stock market risk tolerance capacity plays a positive role in furthering economic growth (Zhang et al., 2016). Needless to say, that, the prevalence of unfair trading practices undermines risk tolerance capacity especially if detection and prosecution policies are unresponsive (Wei, 2015). In this vein, financial risks ultimately translate into economic risks. In effect, manipulation directly constitutes a financial risk and indirectly an economic risk, with a strong likelihood to impair economic performance during and after the manipulation period. Essentially, risk tolerance capacity mediates the ability of stock markets to trigger economic growth. It is not surprising, that well-developed markets (with robust risk tolerance capacity) achieve economic recovery rather quickly following economic crisis.

Zhang et al. (2016) capture the effects of both the financial system and financial risk tolerance capacity on economic growth. The authors’ panel unit root tests and co-integration analysis reveal a stable long-run association between financial risk tolerance capacity and economic growth. Also, using a two-step system Generalized Method of Moments (GMM), Zhang et al. (2016) find a negative effect of risk tolerance capacity on growth but a positive effect of the lagged risk tolerance capacity on growth. This finding is insightful and particularly suggests that a higher risk tolerance capacity energizes the economy to cushion economic risks. And this is a good pre-condition for growth.

1. STATEMENT OF THE PROBLEM

Many attempts have been made by various scholars to examine the impacts of financial risks as well as stock market efficiency on economic growth (Batuo et al. 2018; Belcaid and El Ghini 2019; Boamah 2017; Kirikkaleli 2019; Kirikkaleli and Gokmenoglu 2019; Numapau 2018; Nyasha and Odhiambo 2017; Zhang et al. 2016).

Ang 2016; Asteriou and Spanos 2019) may have adopted distinct approaches and measures to illustrate stock market–growth nexus, there appears to be a consensus in two particular areas. First, unlawful market practices widen financial risks in the stock market, in terms of market volatility, declined capitalization and equity volatility (Zhang et al. 2016).

While existing empirical studies (Cournède and Denk, 2015; Madsen and Ang 2016; Asteriou and Spanos, 2019) may have adopted distinct approaches and measures to illustrate stock market–growth nexus, there appears to be a consensus in two particular areas. Unlawful market practices widen financial risks in the stock market, in terms of market volatility, declined capitalization and equity volatility (Zhang et al., 2016).

It has commonly been assumed that there are variables that impact on economic growth other than stock market efficiency measures. It is therefore imperative to take account of certain control variables, such as discount rate and trade openness, to avoid endogeneity problem (Gujarati, 2015). Martin (2017) opined that government policy could shape the association between the stock market and economic growth. It is in the light of the above, that the study will try to investigate the relationship between stock market and economic growth of Nigeria.

1. AIM AND OBJECTIVES OF THE STUDY

The aim of this study will be to investigate the relationship between stock market and economic development in Nigeria.

The study specific will be to:

1. Examine the relationship effect between stock market and economic development of Nigeria
2. Examine the impacts of financial risks as well as stock market efficiency on economic growth of Nigeria
3. Ascertain whether other variables  impacts on economic growth of Nigeria other than stock market
4. Find out whether government policy could shape the association between the stock market and economic growth of Nigeria

1. RESEARCH QUESTIONS

Arising from the research objectives; the following research questions will be addressed in the study:

1. What is the relationship effect between stock market and economic development of Nigeria?
2. What are the impacts of financial risks as well as stock market efficiency on economic growth of Nigeria?
3. Do other variables impacts on economic growth of Nigeria other than stock market?
4. Does government policy shape the association between the stock market and economic growth of Nigeria?

1. RESEARCH HYPOTHESIS

H0 there is no significant relationship between stock market and economic growth of Nigeria

H1 there is significant relationship between stock market and economic growth of Nigeria

1. SIGNIFICANCE OF THE STUDY

The study is very important because it will reveal the relationship that exists between stock market and economic growth. The study will reveal the contributions and role of stock market to economic growth.

Through the study finding, Economists, Government and citizens in general will know that stock market is a symbol of the nation’s economy and strength. A country whose stock market is sound and going up is considered to be in great economic status. Since the stock market comprises of the shares of the largest and most successful companies in the country its considered the indicator for the nation’s economy and industrial production.

1. SCOPE OF THE STUDY

The study is on empirical analysis of the stock market on economic growth of Nigeria. It is limited to entrepreneurs, economists, policy and makers of the State.

The study covers and investigates the relationship effect of stock market and economic growth of Nigeria; the impacts of financial risks as well as stock market efficiency on economic growth of Nigeria; other variables impacts on economic growth of Nigeria other than stock market; government policy shape the association between the stock market and economic growth of Nigeria.

1. LIMITATION OF THE STUDY

TIME CONSTRAINTS: One the challenges experienced by the researcher is the issue of time; the research will simultaneously engage in departmental activities like seminars and attendance to lectures. But the researcher was able to meet up with the deadline for the submission of the project.

FINANCIAL CONSTRAINTS: Every research work needs funding; however lack of adequate funds might affect the speed of the researcher in getting materials for completion of the project.

1. DEFINITION OF TERMS

Stock market

Simply put, stock market is a market place where buyers and sellers meet to exchange a unique intrinsic commodity – shares, stocks, bonds – for the purpose of raising long-term capital for the modernization and expansion of projects by companies, governments, and allied parastatals. Stock market is different from a stock exchange, which is an entity (a corporation or mutual organization) in the business of bringing buyers and sellers of stock together.

Market Capitalization

Market Capitalization is the total value of listed shares of companies in the stock market. Market Capitalization Ratio (MCR) measures the value of listed shares divided by GDP.

Economic growth

Economic growth is an increase in the production of economic goods and services, compared from one period of time to another. It can be measured in nominal or real (adjusted for inflation) terms. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used.