There have been growing concern 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, 1998; Sule and Momoh, 2009;
Ewah, Esang and Bassey, 2009). There have been mixed results; while some are in support of a positive relationship, some negative relationship and others do not find any empirical evidence to support such conclusion. For instance, Atje and Jovanovic (1993) find in a cross country study of stock and economic growth of 40
countries from 1980 to 1998 that there was a significant correlation between the average economic growth and stock market capitalization. Levine and Zervos (1996) examine whether there was a strong empirical relationship between stock market development and long run economic growth. They found a strong correlation between those phenomena. Demirgue-Kunt and Levine (1996) using data from 44 countries for period 1986 and 1993 find 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 fund. They concluded that countries with well-developed stock markets tend to also have well developed financial intermediaries.
Besides evaluating the general importance of the financial system in economic growth and development, other researchers had stressed empirically the specific role of capital market (stock and bond markets) in economic growth.
Levine and Zevros (1996) opine that stock market development is positively associated with economic growth, although with a caveat that the result of their research should be viewed as suggestive partial correlation that should stimulate further research rather than as conclusive findings.
According to their findings, stock markets may affect economic activity through their liquidity since high return projects require a long-run commitment of capital. However, as investors are generally reluctant to relinquish control of their
savings for long periods and without liquid market and other financial arrangements that provide liquidity, less investment may occur in the high-return projects.
This was the finding in an earlier study carried out by Hicks (1969). He posited that the industrial revolution was not the consequence of a set of new technological innovation since technological innovation by itself was insufficient to stimulate growth. Also, he maintained that the pre-condition for the implementation of new technologies was the existence of liquid capital markets.
Therefore, according to him, the industrial revolution had to wait for the financial revolution before it could occur. Research findings have also confirmed that capital market development may influence economic growth through risk diversification. Several authors have shown that stock markets provide a vehicle for diversifying risk (Saint Paul, 1992; Devereux and Smith 1994).
Risk diversification has been discovered to influence economic growth through the shifting of investments into higher-return projects. This is due to the fact that projects with high expected returns tend to be comparatively riskier.
Therefore, better risk diversification through internationally integrated stock markets will foster investment in projects with high returns.
In their own study, Bencivenga, Smith and Starr (1996), examined empirically how the efficiency of an economy’s capital resale or equity market – as measured by the costs of transacting in them – affect the economy’s efficiency in producing physical capital and, through this channel, final goods and services.
They agreed with the line of thinking of Hicks (1969) that emphasized the role of equity markets in providing liquidity to holders of long-live and inherently illiquid capital. Their research result showed that as the efficiency of an economy’s capital markets increases (i.e. as transaction costs fall), the general effect is to cause agents to make longer-term, and more transactions–intensive investments. This results to a higher rate of return on savings and investments as well as a change in their composition.
The World Bank (1994) found that stock market development does not merely follow the trend of economic development, but provides the means to predict future rates of growth in capital, productivity and per capital GDP. The submission of the Bank is that, increase in banking and stock market development leads to increased real per capital growth. Hamid and Sumit (1998) research the relationship between stock market development and economic growth for 21 emerging markets over 21 years, using a dynamic panel method. Their results confirmed a positive relationship between several indicators of stock market performance and economic growth both directly and indirectly by boosting private
investment behavior. In Belgium, Nieuwer et al (2005) investigates the long term relationship between economic growth and financial market development. The authors used a new set of stock market development indicators to show that financial market development substantially affects economic growth. They found very strong evidence that stock market development leads to economic growth in Belgium, especially in the period between 1973 and 1993.
Chee et al (2003) posits that stock market development has a significant positive impact on economic growth in Malaysia. Liu and Hsu (2006) indicate a positive relationship on economic growth of stock market development in Taiwan, Korea and Japan. The work of Francia et al (2007) posits that shareholder protection causes stock market development and eventually economic growth.
In Nigeria, several authors have also attempted to examine the relationship between stock market development and economic growth. For instance, Adam and Sanni (2005) examine the roles of stock market on Nigeria’s economic growth using Granger-causality test and regression analysis. The authors found out a one-way causality between GDP growth and market capitalization and a two-one-way causality between GDP growth and market turnover. They also confirmed a positive and significant relationship between GDP growth turnover ratios. The authors advised that government should encourage the development of the capital market as it has a positive effect on economic growth.
Abu (2009) investigated whether stock market development raises economic growth in Nigeria, by employing the error correction approach. The econometric results indicate that stock market development (market capitalization/GDP ratio) increases economic growth. He, however, recommended the removal of any impediment to stock market development which include tax, legal and regulatory barriers, development of the nation’s infrastructure to create enabling environment where business can strive, employment policies that will increase the productivity and efficiency of firms as well as encouraging the Nigerian Securities and Exchange Commission to facilitate the growth of the market, restore the confidence of stock market participants and safeguard the interest of shareholders by checking sharp practices of market operators.
Osinubi and Amaghionyeodiwe (2003) also investigated the relationship between stock market and economic growth during the period 1980 – 2000 using ordinary least squares regression (OLS). The result indicated that there is a positive relationship between stock market and economic growth and suggest the pursuit of policies geared towards rapid development of the stock market.
Obamiro (2005) examines the role of the Nigeria stock market in the light of economic growth. The author reported a significant positive effect of stock market on economic growth. Ezeoha et al. (2009) examines the nature of the relationship
that exists between stock market development and the level of investment (domestic private investment and foreign private investment) flows in Nigeria.
The authors found out that stock market development promotes domestic private investment flows thus suggesting the enhancement of the economy’s production capacity as well as promotion of the growth of national output. However, the results indicate that stock market development has not been able to encourage the flow of foreign private investment in Nigeria.
Efforts were also made by Nyong (1997) to produce an aggregate index of capital market development and used it to determine its relationship with long-run economic growth in Nigeria. The study employed time series data from 1970 to 1994. Four measures of capital market development – the ratio of market capitalization to GDP, (in percentage), the ratio of total value of transactions on the main stock exchange to GDP (in percentage), the value of equities transaction relative to GDP and listings were used. All the four measures were combined into one overall composite index of capital market development using principal component analysis. A measure of financial market depth (which is the ratio of broad money to GDP) was also included as a control variable. The result of the study shows that capital market development is negatively and significantly correlated with long-run economic growth in Nigeria.
Ted et al. (2005) examined the empirical association between stock market development and economic growth in India. Whereas the authors found support for the relevance of stock market development to economic development during pre-liberation, they found out a negative relationship between stock market development and economic development for the post liberalization period. Ewah et al. (2009) examined the impact of capital market efficiency on economic growth in Nigeria, using time series data on market capitalization, money supply, interest rate, total market transaction, and government development stock between 1961 – 2004 using multiple regression and ordinary least squares estimation techniques.
The result of the study indicate that the capital market in Nigeria has the potential to induce growth, but it has not contributed meaningfully to the economic growth of Nigeria because of low market capitalization, low absorptive capacity, illiquidity, misappropriation of funds among others.
Some authors focus on the causal relationship between stock market development and economic growth. For instance, Gursoy and Muslumov (1999) confirm the existence of a bi-directional causal relationship between stock market development and economic growth. Their study also confirms a stronger association between stock market development and economic growth in developing countries. Following Gursoy and Muslumov (1999), authors like Luintel and Khan (1999) and Hondrtoyiannis et al (2005) also indicate a
bi-directional causal relationship between stock market development and economic growth.
Furthermore, Demiurgue-kunt and Masksimovic (1998) have shown and re-emphasized the complimentary role of stock market and banks that they were not rivals or alternative institutions; using 30 countries from 1980 to 1991. Levine and Zervos (1998) use pooled crossed 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 Demiurgue-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 capital was regressed on a variety of variables designed to control for initial conditions, political instability, investment in human capital and macroeconomic 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 seem to correlate to economic growth.
Demiurgue-Kunt and Maskimovic (1998) cited in Henry (2000) find a relationship between economic growth and stock market activities in the field of transmission of security (secondary market) more than in funds channeling
(primary market). Barlett (2000) demonstrates that a rising stock price raises the wealth of the economy (wealth effect) by encouraging increase in consumers’
consumption and increase in investment. Harris (1997) did not find hard evidence that stock market activity affects the level of economic growth.
Okoye, Okoje and Ezejiofor (2015) seeks to determine the impact of capital market efficiency as a panacea to the economic growth in Nigeria since democratic dispensation using Gross Domestic Product, Credit to Private Sector, Total Investment, and Stock Market Capitalization. They collected data for the study from CBN statistical Bulletin and a statistical non-parametric test called Analysis of Variance (ANOVA) was used because it measures or tests three or more independent means. SPSS 20.0 Version was used in testing the hypothesis. Their result showed that capital market has positive and significant impact on economic growth in Nigeria. They recommended that investment, credit to private sector, and stock market capitalization on GDP has linear relationship on the Nigerian economic growth.
Edame and Okoro (2013) did a study on the impact of capital market on economic growth using time series data from 1970 to 2010. They employed Ordinary Least Squares (OLS). Their result showed that capital market has positive and significant impact on economic growth in Nigeria. The capital market variables captured in the model such as market capitalization, number of
deals and value of transactions were all positive and significant in promoting economic growth in Nigeria. It is important that the government should implement policies that will make the market more efficient and re-positioned for growth within the Nigerian economy.
Yadirchukwu and Chigbu (2014) examine the impact of capital market on economic growth in Nigeria. They adopt a time-series research design relying extensively on secondary data covering 1985-2012 and utilizes regression analysis as data analysis method incorporating multivariate co-integration and error correction to examine characteristics of time series data adopting disaggregate the capital market indices approach. Their finding suggests that two exhibit positive while two exhibit inverse and statistically significant relationship with economic growth. This could stimulate dialogue on the implication for policy simulation. Recommendation is that relevant regulatory agencies should focus on enhancing efficiency and transparency of the market to improve investor’s confidence. Therefore the need for effective and favourable macroeconomic environment to facilitate economic growth and ensure that channels of capital market induced growth are built around effective systems; and those policy institutions are active in making systemic checks and appropriate policy innovations to ensure capital market led economic growth.
Afolabi (2015) empirically examines the impact of the Nigerian Capital Market on the Nigerian economy looking at a 20 years period from 1992 to 2011.
The Nigerian Capital Market was proxy as Market Capitalization against some variables of the economy such as Gross Domestic Product (GDP), Foreign Direct Investment, Inflation Rates, Total New Issues, Value of Transaction and Total Listing. Using the multiple regression analysis, he finds that Capital Market has an insignificant impact on the economy within the period under review. He therefore advised that policies and measures that would boost investors’ confidence should be enshrined in the running of Nigerian Capital Market so that it could contribute significantly to the growth of Nigerian economy noting that all elements of the market are essential ingredients to the development of a nation.
Dabo (2015) examines the impact of capitalization of the Nigerian capital market and it’s growth on the Nigerian economy. She employs annual time series data from 2001 to 2012 (12 year period) collected from various issues of Central Bank of Nigeria’s Statistical Bulletin and Annual Report and statements of Accounts of Nigeria Stock Exchange. A regression analysis was adopted in computing the interaction between the capitalization of the Nigerian capital market and Nigeria’s economic growth. The empirical results showed that, there was unidirectional causality between capitalization of the stock market and
economic growth, which ran from economic growth (GDP) to capitalization of the stock market (MCAP) at 5 percent significant level. She concludes that the Nigerian capital market needs to create more confidence to investors, especially in terms of transparency and accountability, for sustainable and increasing capitalization necessary for sustainable economic growth in the country.
Furthermore, she recommends expansion of the Nigerian Stock Market by the government creating an enabling investable environment, that will increase both the volume of transactions and number of stocks traded in the market. This will improve their ability to mobilize resources and efficiently allocate them to the most productive sectors of the economy.
Amu, Nwezeaku, and Akujuobi (2015) evaluate the impact of growth in capital market on economic growth in Nigeria using regression analysis on annual data from 1981 to 2012. Their results provide evidence to show that the capital market has significant positive impact on economic growth in Nigeria.
The results also show that growth in market capitalisation does not have significant impact on the economy in Nigeria. They recommended that capital market regulatory authorities should put in place polices that will enhance and sustain the market’s contribution to economic development.
Ovat (2012) examined the effect of stock market development on economic growth in Nigeria. The study disaggregated stock market
development into stock market size and stock market liquidity with a view to providing evidence on the aspect of stock market development which is the main driver of growth in Nigeria. He applied several econometric techniques such as unit root test, co-integration and granger causality test, and the result revealed that stock market development contributes significantly to economic growth in Nigeria through the market liquidity based indicators: total value of shares traded ratio and turnover ratio.
The effect of stock market on economic growth in Nigeria was examined by Ohiomu & Enabulu (2011) using ordinary least square regression (OLS). They employed data from 1989 to 2008 and their result indicated that economic growth is positively affected by all the stock market development variables.
Examining the impact of stock market on economic growth in Nigeria, Edame, Okoro & Anne (2013) regressed annualized time series data & market variable and observed that stock market has positive and significant impact on economic growth in Nigeria between the period 1970-2010.