The Analysis of the Impact of the Capital Market Performance on Economic Growth in Nigeria: 1986 – 2017

Abstract

The capital market is one sub-sector that is currently considered to drive production through its unique role as a channel of funds to investment that will impact positively on economic growth and development. The issuance of equity securities enables companies to acquire perpetual funds for development and to avoid the over-reliance on debt financing from the money market; thus, equity finance remains the cheapest and flexible source of finance. In view of this, this study addresses the impact of capital market performance on economic growth in Nigeria. It uses time-series secondary sourced data that cover the period 1986 to 2017 and relies on Ordinary Least Square method to analyse the long-run relationship. It also uses Pairwise Granger Causality test to examine the direction of causation between explanatory variables and dependent variable. Empirically, the results show relationship between economic growth (Y) and market capitalization (MCP) and degree of openness (OPN), while a negative relationship exists between Y and value of share traded (STV) and Portfolio Investment (POI). MCP significantly impact on Y at 5 percent level of significance and depicts a unidirectional causal relationship with Y. The coefficient of determination (R²) is 0.913680, suggesting 91 percent variation in economic growth as accounted for by the explanatory variables. The study recommends government should liberalize the economy to encourage foreign investors and deepen the equity market, as well as contribute fund injection into the economy, as well as create policies that would encourage large participation of stock investors and quick access to securities trading.

Keywords: Capital Market Performance, Economic Growth, Nigeria.