Abstract

The study is an appraisal of the Role of Nigerian Stock Exchange in capital

formation in Nigeria, using time series data on market capitalization, money
supply, interest rate, total market transaction and government development stock
that ranges between 1981 to 2010. The model specification for the analysis of data
is multiple regression and ordinary lest squares estimation techniques. The result of
the study shows that the capital market in Nigeria has the potentials of growth
inducing, but it has not contributed meaningfully to the economic growth of
Nigeria. This is as a result of low market capitalization, low absorptive
capitalization, illiquidity, misappropriation of funds among others. The empirical
test indicates that, these variables satisfied the economic apriori and are
statistically significant except total transactions and money. Thus it was concluded
and recommended that, the capital market remain one of the mainstream in every
economy that has the power to influence economic growth, hence the organize
private sector is encourage to invest in it. This will enable the capital market
improve its illiquidity status for economic growth and development. Therefore the
government must contribute in order to achieve these objectives through investing
government securities in productive sectors and relaxing laws that spell threat to
the capital market.
.
4.1 Regression Result and Analysis
Table 4.4 shows the regression equation for capital market role and
economic growth, and the regression result. Observation shows that the result is
consistent with economic apriori expectation. The co-efficient of the constant term
is 11.9989, which is positive and statically significant. The coefficient of the log of
money supply (LNMS) is negative. This implies that the Nigerian economy has
low absorptive capacity and hence cannot absorb financial capital productively.
The result confirms Ndebbio (2006) earlier assertion that Nigeria and some other
under developed countries have low absorptive capacity. The results of the log of
market capitalization (LNMC) and total transactions in the stock market (LNTTR)
assume positive sign. This means that a large capital market size and with the
simplicity in buying and selling of securities, has the potential to enhance growth.
Furthermore, the coefficient of log of government development stock (LNGDS)
indicates negative. This implies fund raised by the government in capital market
are sometimes spent on unproductive sector that does not enhance economic
growth. Like the case where office holders in government swindle public fund for

their private use. The determinant of share prices, interest rate (ITR) is positive
from the result above. It invariables means that the Nigeria capital market depends
on the prevailing situation. For instance if interest rate is high, the demand for
shares will be low and speculative investors are likely to buy more of the shares,
only to sell them when share prices are high as interest rate falls. The profit they
make in future induces economic growth. Based on the results of the independent
variables as explained by the dependent variable; it can conclusively be said that
market capitalization and interest rate have positive impact on growth while
government stock retards growth. But the three variables are statistically
significant. On the other hand total transactions and money supply variables are not
statistically significant. The coefficient of multiple determinations (R2) of 0.99 or
99 percent variation in the observed behaviour in the dependent variable is jointly
explained by the independent variables. The remaining 0.01 or one percent is
captured by the stochastic error term. Thus the high R2 indicates that the model is a
good fit. The F-statistics of 432.5 indicates that it is statistically significant. A
cursory examination of the Durbin-Watson (DW=1.2) statistics result shows that
the test is inconclusive, hence it can not be concluded with certainty that auto
correlation exist or not.
5. Conclusion
This study reveals that there is a linkage between capital market role and
economic growth and development, vis--vis market capitalization, money supply,
total transaction in stock, government development stock and interest rate. As it
can be observed market capitalization, government development stock and interest
rate are important capital market variables that are capable of influencing
economic growth in Nigeria. This is because, a large capital market widen the
prospect for growth and also government development stock if well invested and
not misappropriated to un-lucrative sector that does not have the potentials of
growth inducement. Further more, interest rate acts as a function of what happens
in the capital market. Like-wise money supply and total transaction in stock are
potential growth inducing macro-economic variables that are capable of enhancing
economic growth in Nigeria. But the study clearly shows that Nigeria economy has
low absorptive capacity, that is financial capital cannot be absorbed productively to
stimulate economic growth and development. Moreover, the market is
characterized by illiquidity and excessive government regulations.

4.3 Analysis of the Nigerian Capital Market

Performance
The Nigerian capital market has performed
fairly despite the numerous challenges and
problems some of which include: the buy and
hold attitude of Nigerians, massive ignorance of
a large population of the Nigerian public of the
nature and benefits of the capital market, few
investment outlets in the market, lack of capital
market friendly economic policies and political
instability, private sector led economy and less
than full operation of recent developments like
the Automated Trading System (ATS), Central
Securities Clearing System (CSC), On-line and
Remote Trading, Trade Alerts and Capital Trade
Points of the Nigerian Stock Exchange.
4.3.1 Total New Issues
The total new issues before 1989 was below
N1 billion. However, from 1989 to1996 it hovered
between N1 billion to N10 billion. The amount
crossed the N10 billion marks in 1997. For
instance, between 1996 and 2001, a total of 172
new issues (securities of public companies
amounting to N56.40 billion) were floated in the
capital market. The total new issues were valued
at N5.85 billion in 1996 but it rose by about 532%
to N37.198 billion in 2001. Total new issues was
N61, 284 billion, in 2002, N180, 079.9 billion in
2003. N195,418.4b in 2004 and N552,782b in 2005.It
crossed the trillion mark in 2007 being N1.935
trillion that year but fell to N1.509 trillion in 2008.
(see Appendix 1)
4.3.2 Market Capitalization
This is the most widely used indicator in
assessing the size of a capital market to an
economy. In a bearish market the market
capitalization falls and vice versa for a bullish
market. Before 1988, the total market capitalization
was less than N10 billion from 1988 to 1994. It
hovered between N10 billion to N57 billion. In 2003 it was N1,3593 trillion,
N2.1125 trillion in 2004

and N5.12 trillion in 2006.The market capitalization

recorded the highest value of N13.2294 trillion in
2007.But this fell to N9.562 trillion in 2008 due to
the global financial meltdown. The percentage
market capitalization compared to the economys
Gross Domestic Product (GDP) helps to assess
the size of the stock market. In1981, this was
10.5%, but fell to 7.4% in 1994. It rose again to
9.3% in 1995, 10.6% in 1996; 18.9% in 2003, 25.6%
in 2004 and 27.4% in 2005
4.3.3 Listed Securities
The number of equities listed increased from 3 in 1961 to 13 in 1971, 93 in 1981 in
2001 and 198 in 2005. For the SSM, it was 1 in 1985 and 20 in 1995. After falling
from 23 in 1993, it fell to 19 in 1997 and from then to 2005 it remains at 16. The
total securities increased from 8 in 1961 to 60 in 1971; 194 in 1981, 23 in 1991,
261 in 2001 , 288 in 2005 and 301 in 2008.It would be observed the total listed
securities is still low despite almost 50 years of the existence of the Nigerian Stock
Exchange.
4.3.4 Value of Transactions
From 1961 to1975, the annual value of the NSE was below N100 million.
However, from 1976 to 1994 it was between N100 million and N600 million. In
1995, the trading value crossed N1 billion. It was N120.70b billion in 2003,
N225,820.5 billion in 2004 and N4,4 trillion in 2008. From 1961 to 1994,
Government Stock dominated the market between 58.91% and 99.5% whereas
from 1995 the industrial securities continue to dominate the market.

ABSTRACT
This study attempts to empirically examine the impact of stock market
capitalization, value of listed securities and all share index on Gross
Domestic Products of the Nigeria economy over twenty eight (28) year
period. The unit root test and co-integration test were carried out. The result
revealed a positive relationship between market capitalization and output
level of Gross Domestic Product (GDP). The result also show that the value of
listed securities had a positive and significant relationship with the output
level of Gross Domestic Product (GDP) while the all share index has a

negative and a significant relationship with the output level of GDP. The
implication of this result is that the growth or increase in market
capitalization and value of listed securities up to 2008 has resulted to
increases in output level of GDP in Nigeria. It is recommended that policy
makers and market regulators in Nigeria should sustain policy measures that
will ensure continuous increase in the GDP.

Table 1: Normalized co-integrated coefficients, (1) co-integration

equation(s)
Market
Capitalizat
ion

Value of
Listed
Securities

Governme
nt Stocks

All Share
Index

1.000000
(-1.110)

6.017
(1.033)

0.000
(2.041)

220.936
(3.048)

Industrial
Securities
6.036
(0.199)

GDP

-350.039
(-1.745)

Test indicates two co-integrating equation(s) at 5% significance level. Based

on the estimates, the long run elasticity can only be reported for market
capitalization, value of listed securities and all share index variables. The value of
the long-run elasticity of output level of Gross Domestic Product with respect to
market capitalization is -350.039. This is obtained from the coefficient, and the
implication of this is that the long run relationship between output level of gross
domestic product and market capitalization is negative. Value of listed securities
has a long run positive relationship with output level of government stocks indicate
no effect and all share indexes have a long run positive relationship with the
efficiency level of market capitalization.

Table 2 Model Summary

R
R2
Adj. R
Std Error of
estimate
Durbin Watson
F Value
DF

=
=
=

0.995
0.990
0.987

=
=
=
=

3.65753
1.739
379.309
5

The coefficient of correlation R and Coefficient of determination R 2 measure the

explanatory power of the multiple regression model. From the results, there is a
high coefficient of correlation (99.5 percent). The implication is that the variables
in the equation are useful for explaining the level of stock market performance that
has occurred between 1981- 2010. There is also a highly significant coefficient of
determination (99.0 percent). The standard error of the estimates also known as
residual standard deviation has a value of 3.65753. The F- statistic value is found
to be 379.309. The F value is significant at the 5 percent level. The overall fit of
the regression model measured by the F- statistic, is statistically significant at this
level. The Durbin Watson (DW) statistic of 1.739 indicates that there is no problem
of serial correlation in the regression model. This is a case of positive serial
correlation. Also, multi-colinearity which often present in cross-sectional data
seems to be non existent in the model.

EMPIRICAL RESULTS AND DISCUSSION

The results of model estimation and the various diagnostic tests are
presented below. The model fitting is estimated using the output level of Market
Capitalization as the dependent variable. The results of parameter estimate, along
with the standard errors, t-values and the corresponding critical values are given in
the tables. The signs of all estimated coefficient are revealed in the Ordinary Least
Square (OLS) model in Table 3. The parameters of all variables in Table 5 are
significant at 95% confidence interval.

Table 3: Estimation Results

Model (Variable)
Y
X1
X2
X3
X4

(Constant) Market Capitalization

Coefficient

Std. Error

Beta

-102863.731 92647.332

Sig.

-1.110

.280

Value Of Listed Securities

6.017

5.823

0.726

1.033

.314

Government Stocks

0.000

0.000

0.080

2.041

.055

220.936

72.478

0.987

3.048

.006

6.036

.000

0.114

0.199

.844

-350.039

200.583

-0.793

-1.745

.096

All Share Index

Industrial Securities

X5 GDP

Dependent Variable: (Market Capitalization)

Method: Least Squares
Date: 28/01/2012 Time: 09:33
Sample (adjusted): 1981 2012
In Table 3, market capitalization has a negative relationship with output level
of gross domestic product. The results reveal that 72.60% rise in the market
capitalization corresponds to 79.3% decrease the output level of Gross Domestic
Product, while the F-Statistic shows that stock market operation is enhancing the
growth of Nigeria economy; hence we accept the alternative hypothesis and reject
the null hypothesis. Value of listed securities has a positive and significant
relationship with output level of gross domestic product at first difference. The
implication of this finding is that the growth in value of listed securities up to 2010
has not resulted to increases in output level of gross domestic product in Nigeria.
All share index has a positive and significant relationship with market
capitalization with lagged difference. The co-efficient of determinant shows that
95% of the total variations in the efficiency of market capitalization is explained by
the explanatory variables.
In Table 3 the estimation results using the five explanatory variables
are presented at alpha equal to 0.05 level of significance and also at 0.10. We found
that the, Value of Listed Securities, Government Stocks. All Share Index, Industrial Securities
and GDP are very useful explanatory variables to market capitalization ratio. The Ttest results confirm the trend analysis which other scholars conducted earlier.

Industrial security is not significant at both the 5 percent and 10 percent levels. The
implication of the findings is that although the stock market structure had enhanced
the level of capital formation and thus affected the level of stock market
performance positively, the stock market system has not been efficient in resource
allocation evidently. Here, the process of intermediation in the system is not
efficiently done. Although the stock market system has not grown tremendously in
size and structure this has not been translated in the provision of loans and credits
especially to the real sector of the economy.

CHAPTER 5
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1

Summary

The findings of the study from the analysis done could be summarized as shown below. The main
features of the capital market performance aggregates during the 5 year period, as evidenced from Table 2
were as presented below. The capital market performance index of MS2/GDP moved from 35.9 in 1986
down to 24.2 in 1992 and increased to 29.7 by 1994. This declined further to 15.3 by 1997 before rising to
32.0 by 2004. The aggregate moved down to 18.0 by 2005 and up again to 29.7 by 2007. The trends
above clearly show that the capital market performance index did not experience any dramatic changes
during the period. This is despite the various reforms introduced from 1986 which should have a positive
effect on capital market performance in Nigeria. Although the number of capital market institutions
especially banks, increased following the 1986 reforms, over time, these institutions could not sustain a
high level of intermediation in the system. The presence of weak and terminally distressed banks
especially in the 1990s up to 2003 accounted for the low level of capital market performance index during
the period: This necessitated the banking consolidation reforms introduced in 2004/2005. A high level of
capital market performance should sustain and provide basis for moderate lending rates in any economy.
Curiously, the prime lending rates had remained very high. The major reason for this according to Nzotta
(2004), Ojo (1994) includes technical in solvency and presence of weak banks, the underdeveloped nature
of the capital market system, the lack of interest elasticity, un-responsiveness of the rates to changes in
business cycle and the huge fiscal deficits by the public sector over the years. We also note that the rate of
inflation in Nigeria also remained fairly stable between 1997 and 2007. The ratio of currency outside
banks to money supply progressively declined between 1997 and 2007. The ratio moved from 30.4 in
1979 down to 15.2 in 2007. This shows a higher level of banking habits in the country. The decline had
been more pronounced between 2005 and 2007 following the increased use of Automated Teller
Machines and plastic money in the country. The ratio of market capitalization to money supply witnessed
dramatic changes between 2003 and 2007. The ratio moved from 145.4 in 2002, up to 449.5 in 2003 and
the level of capital market savings ratio (MCAP/GDP) declined between 1986 and 1993 The ratio
experienced an upsurge between 2006 and 2007 but decreased from 2007 to 2010. The same applies to
the market capitalization to GDP ratio. The bank consolidation of 2005 enhanced the operations of banks
and also capital market sector development and this affected the assets of the Nigeria Stock Exchange. In
summary, from the analysis above it is evident that there is relatively a low level of performance of the
capital market in Nigeria during the period of the study. However, the level of capital market performance
has been enhanced just after major reforms in the capital market system. It is also important to note that
the reforms and policy thrusts could have impacted more positively on the system if the issue of systemic
crisis had reduced considerably leading to effective market capitalization

5.2

Conclusion
The study sought to examine the Role of Nigerian Stock Exchange in capital
formation in Nigeria. In the light of this effect, the study equally sought to identify
the long-run impact of the stock market indicators on the economy. The result
indicates that no significant relationship exist between market capitalization and
Gross Domestic Product, and also between the value of listed securities and market
capitalization variables. By implication, market capitalization, all share index and
government stocks affect the economic growth of Nigeria. The value of listed
securities had no significantly effect on the growth rate of the economy. The result

confirms that previous market capitalization and value of listed securities ginger up
current economic growth even in the face of influence by other economic
variables.
From the test of the hypotheses it is evident and conclusive that: There is no
significant relationship between market capitalization and the value of listed
securities in the Nigerian stock exchange; There is significant relationship between
market capitalization and Government Stocks in the Nigerian stock exchange; There
is significant relationship between market capitalization and all share index in the
Nigerian stock exchange; There is no significant relationship between market
capitalization and Industrial Securities in the Nigerian stock exchange and There is
significant but negative relationship between market capitalization and the Gross
Domestic Product (GDP) in Nigeria.
5.3

Recommendations
In order for the Nigerian capital market to be a pivotal force in Nigeria
socio-economic growth and development, the following suggestions are put
forward:
(i)
There should be improvement in the declining market
capitalization by encouraging more foreign investors to participate in the
market, maintain state of the art technology like automated trading and
settlement practices, electronic fund clearance and eliminate physical
transfer of shares.
(ii) There is also need to restore confidence to the market by
regulatory authorities through ensuring transparency and fair trading
transactions and dealing Government Stocks in the stock exchange.
(iii) It must also address the reported cases of abuses and sharp
practices by some companies in the market. Moreover, the total listing in the
NSE is still a far cry compare to other stock exchanges like South Africa and
Egypt. Therefore, to increase the number of listed companies there is need to
ensure stable macroeconomic environment, encourage foreign multinational
companies (MNCs) or their subsidiaries to be listed on the Nigerian Stock
Exchange, relax the listing requirements to the first tier market and ensure
tax rationalization in the capital market to encourage quotation and public
interest in shareholding Government Stocks.
(iv) For new issues, increase the minimum equity capital
requirements for companies other than banks, insurance companies and
other financial institutions, encourage merger and consolidation,
discriminatory income tax in favour of public quoted companies and

aggressive enlightenment programme to increase awareness of the benefits

of investing in the stock market and seeking quotation at the stock exchange.
(v)
To boost the value of transactions in the Nigerian capital
market, there is need for availability of more investment instruments such as
derivatives, convertibles, futures, swaps, options in the market.
(vi)
The private sector should be encouraged to invest in capital
market. This can be done through educating and enlightening the public,
using knowledgeable people and experts or professionals that are competent
in stock market operations.
(vii) The illiquidity status of the capital market should be improved
to make it more viable for investors to invest, and such overtures can
contribute to economic growth. This can be achieved through complete
reversal of the ownership structure.
(viii) The funds raised by government in the form of government
securities in the capital market should be put into productive sectors of the
economy that will necessitate to growth in all facets of the economy.

Appendix 3: Regression Analysis Showing the Relationship between Market Capitalization and Value of Listed
Securities, Government Stocks, All Share Index, Industrial Securities and GDP

Model Summaryb
DurbinChange Statistics
Adjusted R Std. Error of
Model
1

R
.995a

R Square
.990

Square
.987

the Estimate
3.65753E5

R Square

Change

Change

.990 379.309

Watson
Sig. F

df1

df2
5

20

Change
.000

1.739

A. Predictors: (Constant), GDP, Government Stocks, Industrial Securities, All Share Index, Value Of Listed Securities
B. Dependent Variable: Market Capitalization

Coefficientsa
Standardized
Unstandardized Coefficients
Model (Variable)
1

(Constant) Market Capitalization

Coefficients

Std. Error

-102863.731

92647.332

6.017

5.823

.000

Beta

Sig.

-1.110

.280

.726

1.033

.314

.000

.080

2.041

.055

220.936

72.478

.987

3.048

.006

Industrial Securities

6.036E-7

.000

.114

.199

.844

GDP

-350.039

200.583

-.793

-1.745

.096

Value of Listed Securities

Government Stocks
All Share Index

a.

Dependent Variable: Market Capitalization

ANOVAb
Model
1

Sum of Squares

df

Mean Square

Regression

2.537E14

5.074E13

Residual

2.675E12

20

1.338E11

Total

2.564E14

25

F
379.309

Sig.
.000a

A. Predictors: (Constant), GDP, Government Stocks, Industrial Securities, All Share Index, Value Of Listed Securities
B. Dependent Variable: Market Capitalization

Correlations
Value Of

Pearson
Correlatio
n

Market Capitalization

Market

Listed

Government

All Share

Industrial

Capitalization

Securities

Stocks

Index

Securities

GDP

1.000

.922

.094

.924

.954

.891

Value Of Listed Securities

.922

1.000

.048

.788

.982

.879

Government Stocks

.094

.048

1.000

.241

-.015

.323

All Share Index

.924

.788

.241

1.000

.802

.939

Industrial Securities

.954

.982

-.015

.802

1.000

.835

GDP

.891

.879

.323

.939

.835

1.000

.000

.324

.000

.000

.000

Sig. (1-

Market Capitalization

tailed)

Value Of Listed Securities

.000

.408

.000

.000

.000

Government Stocks

.324

.408

.118

.471

.054

All Share Index

.000

.000

.118

.000

.000

Industrial Securities

.000

.000

.471

.000

.000

GDP

.000

.000

.054

.000

.000

Market Capitalization

26

26

26

26

26

26

Value Of Listed Securities

26

26

26

26

26

26

Government Stocks

26

26

26

26

26

26

All Share Index

26

26

26

26

26

26

Industrial Securities

26

26

26

26

26

26

GDP

26

26

26

26

26

26