CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
Stock Market is viewed
as a medium to encourage savings, help channel savings into productive
investment, and improve the efficient and productivity of investment. The
emphasis on the growth of stock markets for domestics‘resource mobilization has
also been strengthened by the need to attract foreign capital in non-debt
creating forms. A viable equity market can serve to make the financial system
more competitive and efficient. Without equity markets, companies have to rely
on internal finance through retained earnings. Large and well established
enterprises are in a privileged position because they can make investment from
retained earnings and bank borrowings, while new companies do not have easy
access to finance. Without being subjected to the scrutiny of the stock market,
big firms get bigger, and for the emerging smaller companies, retained earnings
and fresh cash injections
from the controlling
shareholders may not be able to keep pace with the needs for more equity
financing which only an organized market place could provide. The corporate
sector would also be strengthened by the requirements of equity markets for the
development of widely acceptable accounting standards, disclosure of regular,
adequate, and reliable information. While closely held companies can camouflage
poor investment decisions and low profitability, at least for a while, public
held companies cannot afford this luxury. The availability of reliable
information would help investors
make compares‘ of the performance prospects of
companies; corporations to make better investment and strategic decisions; and
provide better
statistics
for economic policy makers.
Success in capital accumulation and
mobilization for development varies among nations, but it is largely dependent
on domestic savings and inflows of foreign capital. Therefore, to arrest the
menace of the current economic downturn, effort must be geared towards
effective
resource mobilization. It is in realization of this that consideration is given
to measure the development of capital market as an institution for the
mobilization of finance from the surplus sectors to the deficit sectors. Levine
(1991) showed a positive relation between financial stock market and economic
growth by issuing new financial resources to the firms. The financial stock
market facilitates higher investments and the allocation of capital, and
indirectly the economic growth. Sometimes investors avoid investing directly to
the companies because they cannot easily withdraw their money whenever they
want. But through the financial stock market, they can buy and sell stocks
quickly with more independence. An efficient stock market contributes to
attract more investment by financing productive projects that lead to economic
growth, mobilize domestic savings, allocate capital efficiently, reduce risk by
diversifying, and facilitate exchange of goods and services (Mishkin 2001; and
Caporale et al, 2004).
1.2 Statement of the Problem
There is abundant
evidence that most Nigerian businesses lack medium and long –term capital. The
business sector has depended mainly on short-term financing such as overdrafts
to finance even long-term investment. Based on the maturity matching concept,
such financing is risky. All such firms need to raise an appropriate mix of
short- and long-term capital (Demirguc-Kunt and Levine 1996). Most recent
literatures on the Nigeria Capital Market have recognized the tremendous
performance the market has recoded in recent times. However, the vital role of
the capital market in economic growth and development has not been empirically
investigated thereby creating a research gap in this area. This study is
undertaken to examine the contribution of the capital market in the Nigerian
economic growth and development. Aside the social and institutional factors
inhibiting the process of economic development in Nigeria, the bottleneck
created by the deficiency of finance to the economy constitutes a
major setback to its development. As a result, it is
necessary to evaluate the Nigerian capital market.
1.3 Research Questions
In the light of the
research problems, this study attempts to answer the following:
1.
Does stock market have a significant
effect on economic growth?
2.
Does investment have a significant
effect on GDP?
3.
What is the causality between stock
market and economic growth?
Note:
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