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International Journal of Economics and Business Administration
Vol. 5, No. 2, 2019, pp. 125-130
http://www.aiscience.org/journal/ijeba
ISSN: 2381-7356 (Print); ISSN: 2381-7364 (Online)
* Corresponding author
E-mail address:
Effects of Capital Market Development and
Economic Growth in Nigeria from 1981-2018
Augustine Okon Jacob
1, *
, Okon Joseph Umoh
2
1
Department of Management, School of Management Science, Heritage Polytechnic, Ikot Udota, Eket, Nigeria
2
Department of Economics, University of Uyo, Uyo, Nigeria
Abstract
This research work examined the relationship between capital market development and economic growth in Nigeria. Time
series data were collected from both secondary sources and econometric analysis of Ordinary Least Square (OLS). the data
covered 1981 – 2018. The research sought to appraise the relationship of variables, such as market Capitalization (MCAP),
Number of deals (ND), all share value index (ASI) and Inflation (INF) on economic growth of Nigeria. The result revealed has
a positive correlation and conform to prior expectation and significantly influenced economic growth. Inflation revealed
negative correlation and conformed to a priori expectation but was insignificant on the economic growth, which makes it not
determinant in economic growth in Nigeria. Based on the findings of this research, conclusion was drawn and appropriate
recommendations were made for the stakeholders in the capital market such as creation of awareness by government and
organized private sector on the relevance and inherent benefit of investing in the capital market so as to boost the number of
deals in the stock market operators.
Keywords
Share Index, Economic Growth, Inflation, Investment
Received: February 14, 2019 / Accepted: June 13, 2019 / Published online: June 24, 2019
@ 2019 The Authors. Published by American Institute of Science. This Open Access article is under the CC BY license.
http://creativecommons.org/licenses/by/4.0/
1. Introduction
The capital market refers to a collection of financial
institution set up for the granting of medium and long-term
loans. It is a market for long term instruments which include
market for government securities, market for corporate
bonds, and market for mortgage loans [1]. That is its market
for the mobilization and the long-term end of the financial
system. It is composed of the inner capital market (market for
new securities) and the outer capital market (including
insurance companies, building societies, saving banks and
other bodies not directly concerned with the issue of new
securities but which are engaged in the business of long term
borrowing and landing upon which the issue of new
securities depends. Included in the outer capital market are
the special finance companies set to help in improving
medium and long-term capital for industry [1, 2]. Capital
market, like the money market shows a noteworthy part in
the national economy. An advanced, vibrant and vivacious
capital market can contribute meaningfully in the prompt
economic growth and development [3]. It assembles reserves
from persons for additional investments in the creative
channels of an economy, triggering idle monetary properties
and puts them in appropriate investments [4].
The funds which flow into the capital market come from
individuals who have savings to invest, the merchant banks,
the commercial banks and non-financial intermediaries such
as insurance companies, finance houses, mutual funds,
building securities [5]. Further, there are the issuing house
which do not provide capital but underwrite the shares and
International Journal of Economics and Business Administration Vol. 5, No. 2, 2019, pp. 125-130 126
debentures of companies and help in selling their new issues
of shares. The demand of funds come from joint stock
companies for working and fixed capital assets and
inventories and from local, state and central governments,
improvement trusts, port trusts, etc. to finance a variety of
expenditure and sales [6]. Capital market function through
the stock exchange market. A stock exchange is a market
which facilitates buying and selling of shares, stocks, bonds,
securities and debentures [7]. It is not only a market for old
securities and shares but also for new issue shares and
securities. In fact, the capital market is related to the supply
and demand for new capital, and the stock exchange
facilitates such transactions. Thus, the capital market
comprises the complex of institutions and mechanisms
through which medium-term funds and long-term funds are
pooled and made available to individuals, business and
governments. It also encompasses the process by which
securities already outstanding are transferred [8, 9].
The expansion of capital market in Nigeria, as in other
emerging countries has been persuaded by the government.
Though preceding to the founding of stock exchange market in
Nigeria, there existed some fewer formal provisions for the
operation of capital market. The Lagos stock exchange was
set-up in March 1960, and in September 1961, it was
incorporated under section 2 cap 37, through the cooperative
exertion of Central Bank of Nigeria, the Business Community
and industrial development Bank [5]. Capital market plays has
and would continue to play an important role in mobilizing
saving and channelizing them into productive investment for
the development of Nigeria’s commerce and industries.
2. Theory
This study adopts Solow-Swan model as its theoretical base.
2.1. Solow-Swan Model
This can be expressed mathematically as:
Gb/Yt = F (Kt, Lt, At) (1)
Where:
Y = output
K = capital
L = labor
A = index of technology or efficiency and
F = functional relationship
Solow points that F has the usual neoclassical properties; in
particular, it is characterized by constant returns to scale,
decreasing returns to each input, and a positive and constant
elasticity of substitution [10]. The fundamental dynamic
equation of the model relates the evolution of the capital
stock to a constant rate of saving and a constant rate of
depreciation. Labor and the level of technology grow at
exogenous exponential rate [10].
This model assumes that countries use their resources
efficiently and that there are diminishing returns to capital as
labor increases. From these two premises, the neoclassical
model makes three important predictions; first, increasing
capital relative labor creates economic growth, since people
can be more productive given more capital. Secondly, poor
countries with less capital per person will grow faster because
each investment in capital will produce a higher return than
rich countries with ample capital. Thirdly, because of
diminishing returns to capital, economic will eventually reach
a point at which one new increase in capital will create
economic growth. This point is called a ‘steady state’.
If there were no technology progress, growth in this model
would eventually come to a halt. However. The formulation
of the model is chosen to as to allow increases in efficiency
to offset the diminishing returns to capital. The economy
therefore converges to a steady state in which output and
capital per worker both grow at the exogenous rate of
technology progress [11]. As a result of the lack of a clearly
defined theory in economics linking capital market to
economic growth, the model specification in this research
will be on models adopted in the previous studies on the
subject matter.
2.2. Sources of Data
The data for this study was obtained mainly from secondary
sources particularly from Central Bank of Nigeria (CBN)
statistical bulletin, Nigeria Stock Exchange (NSE) books,
Security and Exchange Commission (SEC) market bulletins
and relevant journals.
2.3. Model Specification
On the basis of our theoretical exposition and in particular
following [12], with a little modification (for interest rate
variable) and the inclusion of number of deals, the model for
this study is specified as follows:
Economic growth = f (MCAP)
GDP = f (MCAP)
GDP = a0 + a1LogMCAP + U (2)
GDP = f (ND)
GDP = a0 + a2logND + U (3)
GDP = f (ASI)
GDP = a0 – a3 logASI = U (4)
127 Augustine Okon Jacob and Okon Joseph Umoh: Effects of Capital Market Development and Economic
Growth in Nigeria from 1981-2018
GDP = f (INF)
GDP = a
0
+ a
4
log INF + U (5)
Combining equation 1 – 4.
GDP = a0 + a1MCAP + a2ND + a3ASI + a4INF + U (6)
Where capital market is independent variable and economic
growth is the dependent variable. The variable for which
economic growth was measured was the Gross Domestic
Product (GDP), while the variable for which the capital
market was proxies are market capitalization (MCAP), All
Share Value Index (ASI), the Number of Deals (ND) and also
inflation (INF).
In specific terms, the model is given below:
GDP = f (MCAP, ND, ASI, INF)
Our specified model above can be expressed in econometrics
linear form as follows:
GDP = a
0
+ a
1
MCAP + a
2
ND + a
3
ASI + a
4
INF + U (7)
In a log form
GDP = a
0
+ a
1
LogMCAP + a
2
LogND + a
3
LogASI + a
4
LogINF + U (8)
Where
The a priori expectation is a
1
, a
2
, a
3
, a
4
GDP = real Gross Domestic Product (Proxy by economic
growth)
MCAP = Market Capitalization
ND = Number of Deals
ASI = All Shares Index
INF = Inflation
U = disturbance term
a = intercept
a
1
= a
4
= coefficient of the independent variables
f = functional relationship
Inflation is used in this model as control variable used to
control for omitted variable bias. It is expected that all the
explanatory variables except inflation will have a direct
relationship with the dependent variable. That is a unit
increase in any of this variable will lead to an increase in the
dependent variable. But an increase in inflation (INF) will
enhance GDP decrease i.e. a
1
, a
2
, a
3
> 0 while a
4
< 0. This
would help in ascertaining the nature of the relationship, that
is, whether it is positive or negative and to also determine if
the capital market has significant effect on the economic
growth as stated in our objects [13].
The estimated regression model above will be analyzed using
the following criteria: Economic criteria, Statistical criteria,
and Econometric criteria.
2.3.1. Economic Criteria
This evaluation consists of deciding whether the estimates of
the parameter are theoretically meaningful and satisfactory.
The sign and magnitude of the parameter estimate will be
examined to know whether they are in conformity with their
criteria expectation. Economic criteria will help the
researcher to know when they are deviating from what is
actually required [14].
2.3.2. Statistical Criteria
R
2
(First Order Test)
These measures or explains the total variation in the
dependent variable computed in the models. Under this, we
shall use the T-test, F-test.
T-test: this is used to test statistical significance of individual
estimated parameter. In this research, t-statistic is shoes
because the population variance is known and sample is less
than 30 [15].
F-test: this is used to test for the significance of the joint
influence of the explanatory variables on the dependent
variables is statistically significant [15].
2.3.3. Econometric Criteria
This will be to evaluate if the assumptions of the econometric
method employed is satisfactory or not. The tests carried out
under this criterion are:
Auto Correlation Test: this test will adopt the conventional
Durbin-waston test in checking for the present and
correlation.
Multi-co-linearity Test: this test will adopt the correlation
matrix test in order to check for the degree of multi-co-
linearity among the variables.
Normality Test: this test is carried out to check whether the
error term follows a normal distribution. The normality test
adopted in this research is Jarque Bora (JB) statistics which
follows the chi-square distribution with 2 degree of freedom.
Heteroscedasticity Test: this test was carried out to ascertain
level of distribution of error term (to know whether the
variance is constant). This test was carried out using white’s
Heteroscedasticity Test (with no cross terms). It follows chi-
square distributions with degree of freedom equal to the
number of regressions excluding the constant term [5, 6, 7].
International Journal of Economics and Business Administration Vol. 5, No. 2, 2019, pp. 125-130 128
3. Method of Estimation
In examining the impact of capital market development on
economic growth in Nigeria, this study makes use of the scientific
method of Ordinary Least Square (OLS) regression technique.
The reason for employing the Ordinary Least Square is that of all
classes of estimators, the Ordinary Lease Square (OLS) is the Best
Linear Unbiased Estimator (BLUE) and it has minimum error.
The OLS possesses some salient (relevant) features such as
Unbiasedness, Efficiency, Consistency, Least or minimum
Variable, Least Mean Square Error and Sufficiency when
compared with other econometric estimators.
4. Data Analysis
This data is presented in tables and analyzed using the
method of ordinary least square to determine if any
relationship exists between Market Capitalization (MCAP)
and GDP (used as proxy for economic growth).
Table 1. The result of simple regression of market capitalization
(LogMCAP) on Gross Domestic Product (LogGDP).
Variable Coefficient Std Error T - Stat Prob
Ln (MCAP)
0.791209 0.30821 2567072 0.000
C 10.03352 0.814868 54, 27401 0.000
Dep. Variable – InGDP,
R
2
= 0.955072.
Adj. R
2
= 0.953622.
DW Stat = 0.667608.
F-Stat = 658.7856.
The result from table 1 show a simple regression between
InGDP and logMCAP, it shows that the coefficient of market
capitalization is positive and confirms to a prior expectation
and was significant as indicated by the probability value of
0.000. Therefore, we reject the null hypothesis that market
capitalization does not have significant on Economic growth
and accept the alternative that market capitalization has a
significant impact on economic growth.
Hence, ceteris paribus, a 10% increase in market
capitalization will lead to about 7.9% increase in Economic
growth. The R
2
value of 0.955072 implies that about 95% of
the variable in the explained variable InGDP is attributed to
the changes in explanatory variable InMCAP.
Table 2. Simple regression between InGDP and Number of Deal.
Variable Coefficient Std Error T - Stat Prob
Ln(ND) 1.098952 0.08517 12.5570 0.000
C 1.323914 1.042370 1.270100 0.000
Dep. Variable – InGDP.
R
2
= 0.835699.
Adj. R
2
= 0.830399.
DW Stat = 0.329622.
F-Stat = 157.6785.
Table 2 presents the result of simple regression between
InGDP and Number of Deal (in the stock exchange - logND).
The results indicate that the coefficient of logND is positive
and confirmed to a priori economic expectation and was
significant by the probability value of 0.000.
Therefore, we reject the null hypothesis that number of deals
do not have significant impact on economic growth and
accept the alternative that Number of deals impacted
significantly on economic growth.
Hence, ceteris paribus, a 10% increase in number of deals
will lead to about 10.9 percent in economic growth. The R
2
value of 0.835699 show that 83% of the variations in the
explained variable (InGDP) is attributed to the changes in the
explanatory variable while the remaining 17% is attributed to
the error term.
Table 3. The result of simple regression of All Share Index of economic
growth. Economic growth is the dependent variable.
Variable Coefficient Std Error T - Stat Pro
Log(ASI) 1.008950 0.033518 30.1070 0.000
C 6.178439 0.287491 21.49091 0.000
Dep. Variable – InGDP.
R
2
= 0970025.
Adj. R
2
= 0.968955.
DW Stat = 1.184476.
F-Stat = 906.1139.
Table 3: presents a simple regression between logGDP and
All Share Index (ASI). The result indicates that the
coefficient of ASI is positive and conformed to priori
expectations and was significant by probability value 0.000.
Therefore, we reject the null hypothesis that ASI do not have
significant impact on economic growth and accept the
alternative that ASI impacted significantly on economic
growth. Hence, ceteris paribus, a 10% increase in ASI will
lead to about 10.08% increase on economic growth. The R
2
value of 0.970025 implies that 97% changes in the value of
economic growth can be attributed to changes in All Share
Index while 3% is unexplained by the model.
Table 4. The result of simple regression of inflation (logNIF) on Economic
Growth (InGDP).
Variable Coefficient Std Error T - Stat Prob
Log(INF) -0.031606 0.020805 -1.519103 0.1389
C 14.9233 0.0583346 25.57886 0.000
Dep. Variable – InGDP.
R
2
= 0.069284.
Adj. R
2
= 0.39260.
DW Stat = 0.108485 F-Stat = 2.307675.
Table 4 presents a simple regression between economic
growth (InGDP) and Inflation (InINF). The result indicates
that the coefficient of logINF is negative and conformed to a
priori expectation but was significant. Therefore, we accept
the null hypothesis that inflation has no significant impact on
129 Augustine Okon Jacob and Okon Joseph Umoh: Effects of Capital Market Development and Economic
Growth in Nigeria from 1981-2018
the economic growth.
Hence, ceteris paribus, we are about 86% sure that a 10%
increase in inflation will lead to 0.31% decrease in economic
growth. The R-square value of 0.069284 implies that about
6.9% of the variable in GDP is explained by ASI, while
93.1% is unexplained by the model.
Table 5. Results of multiple regressions of four independent variable on
economic growth.
Variable Coefficient Std. error T - Statistic Prob
LogMCAP 0.068885 0.099964 0.689100 0.4971
LogND 0.260586 0.057715 4.515078 0.0001
LogASI 0.736323 0.121100 6.080290 0.0000
LogINF 0.003036 0.002938 1.033118 0.3114
C 4.864472 0.721511 6.742006 0.0000
Dep. Variable – InGDP.
R
2
= 0.0985311.
Adj R
2
= 0.982960.
DW Stat = 1.13356.
F-Stat = 419.2317.
Table 5 presents a multiple regression between GDP and
various independent variable namely: market Capitalization,
Number of Deal in the stock exchange, All Share Index (ASI)
and Inflation. The results indicate that the coefficient of
market capitalization was positive and insignificant at 0.49 as
indicated by the probability value of 0.4971. The coefficient
of logMCAP was higher in simple regression (table 1) than in
the multiple regression, table 5, implying a less impact on
economic growth.
The coefficient of number of deals was also positive but
lower in equation five than equation 2. It was higher and
significant at the probability value of 0.0001. Hence, ceteris
paribus, a 10% increase in Number of Deals will lead to 26%
increase in economic growth.
Again, the All Share Index was positive, and conformed to a
priori economic expectations and was significant with t-value
of 6.08 level of significance. Hence, ceteris paribus, a 10%
increase in ASI will lead to about 7.3% increase in the value
of the GDP.
The coefficient of inflation was positive in equation five, as
against its negative impact in equation four. The variable was
insignificant at 0.311 level of significance. It didn’t conform
to a priori expectations.
The F-stat of 419.23 also implies a joint significance of all
the explanatory variables in explaining the model. The Adj.
R
2
of 0.982960 implies that about 98.2% of the variations in
GDP is attributed to changes in the four explanatory
variables, while only 1.8% is unexplained by the model. DW
value of 1.163356 indicates an evidence of presence of
autocorrelation. The statistical insignificance of market
capitalization on economic growth could be attributed to
insider abuse which makes the market drive itself on
sentiments, rather than objectivity.
5. Conclusion
This study reveals that Capital market influences economic
growth via market capitalization, All Share Index, Number of
Deals, and Inflation. As it was observed, market
capitalization, number of deals, all share index are important
capital market variables that are capable of influencing
economic growth. Hence, capital market remains one of the
mainstreams in every economy that has the impact economic
growth, therefore, the organized private sector is to invest in
it. It should be noted that all share value index has positive
and significant impact on Gross Domestic Product in Nigeria.
Number of deals has positive and significant impact on the
GDP in Nigeria. Furthermore, inflation has negative but
insignificant effect on economic development in the study.
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