Do Government Expenditure and Debt Affect Stock Market Development in Nigeria? An Empirical Investigation

Abstract

Each year, stock market players in Nigeria look forward to the passage and implementation of the annual budget to stimulate and boost transactions in the market. However there appears to be a dis-connect between government spending and value of transactions therein. The effect of government debt (domestic and external) on the development of the stock market has also been an issue of concern to stakeholders. This paper employs the methodology of cointegration and error correction mechanism to investigate the effect of government expenditure and government debt on value of transactions on the trading floors of the Nigerian Stock Exchange (proxy for stock market development) using annual time series data sourced from the Central Bank of Nigeria Statistical Bulletin. The empirical evidence indicates inter alia that the short-run and long-run effects of federal government recurrent expenditure, domestic debt and external debt on value of transactions on the Nigerian Stock Exchange are statistically insignificant. Government capital expenditure is observed to have had significant negative short-run and long-run effects on value of transactions on the stock market. The implications of the findings and policy options to enhance the value of transactions on Nigeria’s stock market are discussed.

Keywords: Government Debt, Government Expenditure, Stock Market Development, Nigerian Stock Exchange