A Test of Reverse Causation in Capital Market Development and Economic Growth in Nigeria

Abstract

This study sought to examine the impact of Nigeria’s economic growth on the Nigerian capital market by investigating the impact of economic growth on the Nigerian Stock Exchange market capitalization ratio; impact of economic growth on the Nigerian Stock Exchange turnover ratio; impact of economic growth on the Nigerian Stock Exchange value traded ratio; impact of economic growth on new issues in the Nigerian Stock Exchange; impact of economic growth on the number of listings in the Nigerian Stock Exchange and causal relationship between economic growth and capital market growth indicators in Nigeria. The ex-post facto research design was used and time series data for the 15-year period, 1996-2010, were collated from the Central Bank of Nigeria Statistical Bulletins, the Securities and Exchange Commission Statistical Bulletin and the Nigerian Stock Exchange Factbooks. The two-stage least squares (2SLS) regression model was used to estimate the impact of economic growth on conglomerate indices of the Nigerian Stock Exchange for hypotheses one to five while the Granger causality f-statistics was used to test hypothesis six. Values of Stock Market Capitalization Ratio (SMCR), Stock Market Turnover Ratio (SMTR), Stock Market Value Traded Ratio (SMVTR), Stock Market New Issues Ratio (SMNIR) and Stock Market Number of Listings (NSM) were used as proxies for capital market development and adopted as the dependent variables, while the independent variable was the Gross Domestic Product Growth Rate (GDPGR), used as proxy for economic growth. Six hypotheses were considered and descriptive statistics on both the dependent and independent variables were computed. The study found, among others, that economic growth has a positive and non-significant impact on the market capitalization ratio of the Nigerian Stock Exchange (coefficient of SMCR=0.42, t-value = 1.19). Economic growth has a positive and significant impact on the Nigerian stock market turnover ratio (coefficient of SMTR= 0.17, t-value = 29.21). Economic growth has a positive and non-significant impact on the Nigerian stock market value traded ratio (coefficient of SMVTR= 0.00, t-value = 1.66). Economic growth has a positive and non-significant impact on the new issues ratio of the Nigerian stock exchange (coefficient of NIR = 0.00, t-value = 0.03). Economic growth has a negative and non-significant impact on the number of listings in the Nigerian stock market (coefficient of NSM = -0.00, t-value = -0.70). Economic growth and all capital market growth indicators employed do not Granger-cause each other. However, the various capital market growth indicators used Granger-cause each other, and, thus, bi-directional, except for the unidirectional causality running from the Nigerian stock market turnover ratio to the value traded ratio. The study, therefore, recommends, amongst others, that government provides the enabling environment for the economy to thrive in order for the Nigerian capital market to achieve the desired world-class status and compete favourably in international capital markets, the strengthening of legislative and regulatory framework governing the capital market in Nigeria to conform to the legislative and regulatory standards of advanced capital markets. These will increase the confidence of local and foreign investors to patronize the market and save through the mechanism which the market provides. The channeling of these savings into productive investments will further engender the country’s economic growth and development.