An Empirical Analysis of the Determinants of Market Capitalization in Nigeria

Nathanael O. Eriemo


One of the most enduring debates amongst development economists and business decision makers over the years bothers on whether market capitalization causes economic growth or whether it a consequence of increased economic activity or the paradox that stock price movements determine capitalization. Against this backdrop, the objective of this study has been to empirically analyze the determinants of market capitalization in Nigeria using data from the 2010 edition of the Central Bank of Nigeria (CBN) Statistical Bulletin and various issues of the World Bank Indicators for Nigeria between 1980 and 2010 identifying the crucial variables at work as liquidity ratio, value traded, value of equity and the rate of return on investment securities. Using the Ordinary Least Square (OLS) cointegration techniques with its implied Error Correction Mechanism (ECM), the study reveals from the cointegration test results that a long run relationship exists among the variables. The parsimonions ECM result indicates that the return on investment and value traded have the greatest influence on the level of market capitalization in Nigeria. The value of equity also exhibited positively and significant relationship with the level of market capitalization. The error correction showed a satisfactory speed of adjustment. Policies to improve the returns on investment and increase in the value of equity are thus recommended. The monetary authority should further improve the liquidity status.

Keywords: Market Capitalization, enduring debate, stock prices, Error Correction Mechanism

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ISSN (Paper)2224-607X ISSN (Online)2225-0565

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