operators would be inappropriate for financial deepening. Apart from Agu and Chukwu (2008), andAyila, et al, (2014), who used Autoregressive Distributed Lag model,Imoughele and Ismaila (2014); Eweta and Ike (2014),adopted Vector Autoregressive (VAR),while others adopted different analytical techniques for their estimation, ignoring autoregressive tendency in manufacturing sector performance and the future effects of financial deepening strategies.
According to Nguena and Abimbola (2013), the lagged or initial variable of financial deepening contributes significantly to the explanation of the current financial deepening. Besides, the different order of integration of the included variables for this study buttressed this fact and supported the use of ARDL model. Hence, this study adopted Autoregressive Distributed Lag (ARDL) model to analyze the effect of financial deepening on manufacturing sector performance in Nigeria.
The vast majority of the previous studies reviewed mainly used money-based and bank-based proxies of financial deepening ( Fatima, 2004; Ndebbio, 2004; Agu & Chukwu, 2008;
Nzotta & Okereke, 2009; Sulaiman & Azziz, 2012; Adu, Marbuah & Mensah, 2013; Ohwofasa &
Aiyedogbon, 2013; Nguena & Abimbola, 2013; Luqman, 2014; Olanrewaju, Aremo & Aiyegbusi 2015, Frances, et al, 2016) and the capital market components were ignored. According to Nguena and Abimbola (2013), the financial markets deepening indicator has been neglected because the sub-region financial market is still in its infancy and there is dearth of statistical data.
This assertion cannot hold for Nigeria due to the availability of financial market due to the availability of financial market deepening data.
Iyoyibo (2013) argued that stock market is better for the purpose of raising funds to finance growth because it provides greater opportunities for competition and thereby promoting entrepreneurship. Ibenta (2005), Ojo (2004) and Okaro (2002) emphasized the significant roles of capital market in financing long term productivity for growth and development. Besides, in
intermediation process, capital market has irreplaceable advantages and functions in resource allocation and re-allocation for manufacturing sector development and economic growth (Luo &
Zhou, 2009).
The market also provides an avenue for growing firms to raise capital at reduced cost. As such, manufacturing firms and companies operating in a well-deepened financial systemwith developed financial market are less dependent on bank financing, which can greatly reduce the risk of credit crunch (Ojo, 2010). Further, Levine (2005), argued that stock markets and banks provide essential financial services for growth and development of a nation and that the services provided by them may be complementary. Therefore, the bank-based financial deepening measures commonly adopted in the previous studies cannot uni-laterally account for the intermediation ratio.
From the review, all the studies employed a single performance indicator for manufacturing sector, except Bayyurt and Sagbansua (2007) who utilized three performance indicators for manufacturing firms in Turkey. Robertson (1997), Kaplan and Norton (1996) observed that a single measure of performance cannot provide a clear concentration on the critical mission of an establishment. The use of a single performance indicator at a time by previous studies might not be appropriate to produce comprehensive findings.
Therefore, the use of a single performance indicator for manufacturing sector adopted by previous researchers might not be sufficient for policy prescription to make a strong case for the promotion of manufacturing sector in Nigeria.
Finally, the vast majority of previous authors who investigated causality relationship between financial deepening and manufacturing sector performance adopted the Granger Causality test procedure. Although, Granger causality test is widely used, it has many limitations. Among other limitations, it is a two variables causality procedure without any consideration for the effect
of other variables.Hence, there exists the possibility of specification bias. However, Agu and Chukwu (2008) applied Toda-Yamamoto framework, but they employed only the bank-based financial deepening proxies. Karimo and Ogbonna (2016) applied it to study causality between financial deepening and economic growth in Nigeria.
Based on the foregoing,this study employed ARDL procedure to investigate the effect of financial deepening on manufacturing firms performance in Nigeria, using three proxies for financial deepening and three indicators of performance for manufacturing firms. Toda- Yamamoto causality framework was utilized to examine the causal link between financial deepening and average capacity utilization of manufacturing firms in Nigeria.
2.6. Strategies adopted to fill the identified Gaps
Based on the identified gap in the literature, the following additions are made;
The ratio of market capitalization to gross domestic product is included as an index of financial deepening in the capital market. This is done in line with Levine and zervos (1998) who extended the work of King and Levine (1993) to include the independent impact of capital market, as well as banks, on real economic growth. However, Dada (2015), Kwode (2015), Onwumere, Onudugo and Ibe (2013) applied market capitalization as a proxy for financial deepening, but their studies were on economic growth and not manufacturing sub-sector.
Also, against the use of static models by many of the previous studies on the topic, this study utilized Auto-Regressive Distributed Lag dynamic model.
To the best of knowledge, the use of both bank-based and capital market-based intermediation ratios, together with monetization ratio, using ARDL model framework and Toda-Yamamoto causality procedure,to examine financial deepening and manufacturing sector performance nexus, clearly distinguished this study from the previous studies.
Also, this study utilized a three variable framework to measure manufacturing sector performance, which to the best of knowledge, has not been utilized by any previous author in Nigeria. This is done in line with King and Levine (1993) who used three growth indicators as explained in the theoretical framework and Bayyurt and Sagbansua (2007), who applied three performance indicators for manufacturing firms in Turkey. The three proxies are; index of manufacturing production, average capacity utilization and the contribution of manufacturing sector to GDP.
CHAPTER THREE
RESEARCH METHODOLOGY 3.1 Research design
This research is a quantitative study of the “ex-post facto type” using regression design and investigating the effect of financial deepening on manufacturing sector performance in Nigeria.
Financial deepening variables and aggregate value of performance indicators for the listed manufacturing firms in Nigeria stock exchange are utilized for the empirical analysis.