Economic Growth in Nigeria

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Does Stock Market Promote Economic Growth In Nigeria?

Tokunbo Simbowale Osinubi Department of Economics Faculty of the Social Sciences University of Ibadan, Ibadan Oyo State, Nigeria and Department of Economics Faculty of the Social Sciences University of Lagos, Akoka Yaba, Lagos State, Nigeria. Telephone: 23417919456, 2348034052502 Fax: 23412620610 E-mail: Keywords: Stock Market, Economic Growth, Nigeria


Does Stock Market Promote Economic Growth In Nigeria?
ABSTRACT The stock market is a common feature of a modern economy and it is reputed to perform some necessary functions, which promote the growth and development of the economy. This study examines whether stock market promotes economic growth in Nigeria. To achieve this objective, ordinary least squares regression (OLS) was employed using the data from 1980 to 2000. The results indicated that there is a positive relationship between growth and all the stock market development variables used. With 99 percent R-squared and 98 percent adjusted R-squared, the result showed that economic growth in Nigeria is adequately explained by the model for the period between 1980 and 2000. By implications 98 percent of the variation in the growth of economic activities is explained by the independent variables. The results of the study, which established positive links between the stock market and economic growth, suggests the pursuit of policies geared towards rapid development of the stock market. Also, all sectors of the economy should act in a collaborative manner such that the optimum benefits of linkages between stock market and economic growth can be realized in Nigeria.


Introduction Mobilization of resources for national development has long been the central focus of

development economists. As a result of this, the centrality of savings and investment in economic growth has been given considerable attention in the literature (Rostow, 1960; Malivaud, 1979; Soyode, 1990; Aigbokan, 1995; Samuel, 1996; Demirguc-Kunt and Levine, 1996). For sustainable growth and development, funds must be effectively mobilized and allocated to enable businesses and the economy harnessed their human, material, and management resources for optimal output. The stock market is an economic institution, which promotes efficiency in capital formation and allocation. The stock market enables governments and industry to raise long-term capital for financing new projects, and expanding and modernising industrial/commercial concerns. If capital resources are not provided to those economic areas, especially industries where demand is growing and which are capable of increasing production and productivity, the rate of expansion of the economy often suffers. A unique benefit of the stock market to corporate entities is the provision of long-term, non-debt financial capital. Through the issuance of equity securities, companies acquire perpetual capital 2

for development. Through the provision of equity capital, the market also enables companies to avoid over-reliance on debt financing, thus improving corporate debt-to-equity ratio. The existing literature clearly shows that developed economies had explored the two channels through which resources mobilization affects economic growth and development – money and capital markets (Samuel, 1996; Demirguc-Kunt and Levine, 1996). This is however, not the case in developing economies where emphasis was placed on money market with little consideration for capital market (Nyong, 1997). Since the introduction of structural adjustment programme (SAP) in Nigeria, the country’s stock market has grown very significantly (Alile, 1996; Soyode, 1990). This is as a result of deregulation of the financial sector and the privatization exercises, which exposed investors and companies to the significance of the stock market. Equity financing became one of the cheapest and flexible sources of finance from the capital market and...
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