An Impact Analysis of Real Gross Domestic Product Inflation and Interest Rates on Stock Prices of Quoted Companies in Nigeria Daferighe. Emmanuel E Lecturer, Department of Accounting, Faculty of Management Sciences Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria E-mail: firstname.lastname@example.org Tel: +234-805-5218-253 Aje. Samuel O Lecturer, Department of Accounting, Faculty of Management Sciences Olabisi Onabanjo University, Ago-Iwoye, Ogun State, Nigeria Tel: +234-803-7173-900 Abstract Market reacts differently to various factors ranging from economic political, and socio-cultural. The stock prices of quoted companies in Nigeria are affected either positivity or negatively by a number of factors occurring within or without the economic system. The paper examines the impact of Real Gross Domestic Product (RGDP), Interest Rate (INT) and Inflation Rate (INF) on stock prices of quoted companies in Nigeria from 1997 – 2006. Stock prices were represented by Stock Market Value Index in the model, which is SMVI = α0 + α1 INT + α2 INF + α3 RGDP + u. A regression analysis showed that the explanatory variables accounted for 95.6% of the variation in stock prices. While a reduction in interest and inflation rate resulted in increased stock prices, increased RDGP has a positive impact. Government should therefore implement policies that will reduce inflation rate and improve the standard of living of its citizens. Interest rate should be made moderate so as to encourage investment and transactions in stock. Keywords: Stock prices, Real Gross Domestic Product, Interest rate, Inflation rate, Market information.
No economic activity operates in a vacuum. Market reacts promptly and uncharacteristically to rumours of war, changes in regulatory environment; political climate seen as a negative factor by the business (investing) community; and interest rate variation to general performance of the economy. It is a common trend for stock prices of some quoted companies to rise and fall or fall and rise twice or thrice within a year. The stock prices of quoted companies on the Nigerian Stock Exchange (NSE) are affected either positively or negatively by a number of factors occurring within and without the economic system. According to Corrado and Jordan (2002), some of the factors influencing stock
International Research Journal of Finance and Economics - Issue 25 (2009)
price behaviour include company profits; political factors; and economic performance. Others are interest rates; inflationary rate; Real Gross Domestic Product; and shareholder-level taxes. Investment in stock market is long-term in nature; any development that could affect the stability of the polity or economy usually has serious impact on the stock prices. In recent times, the NSE has consistently lost points and the prices of stocks have experienced sharp decline. The downward trend in the market performance was attributed to varying reasons in line with those stated by Corrado, et al (2002) However, Onagoruwa (2006) was of the view that stocks with history of good performance and fundamental attributes are good to buy at times like this when their prices are down and more affordable because they are most likely to bounce back since they have the capacity to absorb the depression in the market. The injection of new funds through public offer could turn around the fortune of the market because of the expected liquidity. Hence, it is important for investors to get an understanding of the working of stock prices of quoted companies. According to the Central Bank of Nigeria (CBN) Governor, Professor Charles Soludo, investors should not panic at the present downward trends in the market arena. Of interest to them should be interest rates, inflation rates, liquidity, and the...