Foreign Financial Resources Inflows and Stock Market Development: Empirical Evidence from Nigeria and Ghana.

Abstract

This study empirically investigates the effects of the inflows of foreign financial resources into Nigeria’s and Ghana’s economies, on the development of the countries’ stock exchanges. Using annual time series data covering the period – 1988 to 2011 for Nigeria, and 1991 to 2011 for Ghana, adopting market capitalisation–GDP ratio (MCR) as proxy for stock market development, and employing multiple linear regression technique, the study finds that with the exception of external debt-GDP ratio (EXDTR), the ratios of  inflows of other foreign financial resources (foreign direct investment (FDI), foreign portfolio investment (FPI), personal remittances received (PRR), official development assistance and aid (ODAA)) to GDP, were positively related to MCR, although the relationship between ODAA-GDP ratio and MCR in Nigeria was statistically insignificant within the sample period. On the other hand, FDI-GDP, PRR-GDP and EXDT-GDP ratios were observed to be significantly, negatively related to MCR in Ghana, while ODAA-GDP ratio was positively related to it, indicating that, of all the forms of foreign finances considered, ODAA has been the most relevant in the development of Ghana’s stock exchange. Policy recommendations of the paper include the creation of conducive macroeconomic, socio-political environment required to attract more foreign direct and portfolio investments, as well as enhance the profitability of quoted firms whose securities are listed on the exchange, keeping external public debt at manageable levels, encouraging more firms to get listed the stock exchanges, reducing the cost of stock exchange transactions, proper regulations of the activities of market players, etc.

Keywords: Foreign Finance Inflows, Nigerian Stock Exchange, Ghana Stock Exchange, Stock Market Development.