COMPLETE SCHOOL PROJECT TOPICS & MATERIALS :
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CHAPTER ONE INTRODUCTION
Background to the study
The Capital market in any country is one of the major pillars of long-term economic growth and development. The market serves a broad range of clientele, including different levels of government, corporate bodies and individuals within and outside the country. Capital formation entails accumulated savings out of the current incomes of either organization or individual. It is investment in fixed assets which in part is financed with monies raised through the capital market (Al-Faki, 2006). The Capital market has been one of the major means through which foreign funds are injected into most economies and the tendency towards a global economy is more visible there than anywhere else. It is therefore, quite valid to state that the growth of the capital market has become one of the barometers for measuring the overall economic growth of a nation (Emenuga, 1998).
The development of the capital market has generated two major sets of economic benefits. First, it has improved the allocation of capital, because the prices of corporate debt and equity respond immediately to shifts in demand and supply, changes in the outlook for an industry (and/or company) are quickly embodied in current asset prices. The signal created by change in price of a
security encourages investors as a result of higher prices or discourages them
due to lower prices; this is because the investors often used the prices of securities to predict the likely trend of the market as either bullish or bearish. Businesses with high returns attract additional capital quickly and easily. When there is decline in demand, prices drop, and this signal makes investors to cut the flow of capital to the industry which leads to a decline in economic growth. The ability of companies in their early stages of development to raise funds in the capital markets is also beneficial because it allows these companies to grow very quickly. This growth in turn results into general increase of output in the economy (Abdullahi, 2005).
Although interest in identifying a formal link between financial system and economic growth is fundamental, the basic intuition behind this relation is relatively easy to surmise. This is because of the fact that the main goal of the capital market is the channeling of funds from the surplus sector unit to the deficit sector unit of the economy. It plays a major task in human capital investments which are essential elements of economic growth and development. From this point of view, one should expect that as the capital market develops and deepens, then efficient allocation of the financial resources for the investment is facilitated and thus the frontier of production possibilities is increased (Adam & Sanni, 2005).
Economic growth in a modern economy hinges on an efficient financial sector that pools domestic savings and mobilizes foreign capital for productive investments. Financial markets play an important role in the mobilization of financial resources for long term investment through financial intermediation. The financial market, which comprises the capital and money markets as well as other submarkets, plays crucial roles in the functioning of any modern economy. However, for the purpose of this research work emphasis will be on the capital market. The capital market is believed to be an important sector of every economy whether it is developed or developing. This is because of the fact that the capital market performs a vital role in the growth of the economy by providing the avenue through which foreign investors make investment in the country which in turn may boost the growth of the economy in terms of foreign Direct Investment (Daniel, 1999).
The capital market mobilizes long-term debt and equity finance for investments in long-term assets. Capital markets also help in boosting the financial system as well as improving the economic growth of a country. The capital market supplements traditional lending activities of the financial institutions such as banks by providing risk capital (equity) and loan capital (debt). By means of these instruments, the market is able to mobilize long-
term savings and provide capital to investors to finance long-term investments thereby broadening ownership of productive assets (Daniel, 2004).
Dealers in the securities segment of the capital market include banking institutions, stockbrokers, investment and merchant bankers and venture capitalists that intermediate between the market and the public. Well- functioning financial markets are very crucial for the promotion of global financial integration. An efficiently functioning domestic financial market can better position a country’s competitiveness in the markets for global capital (Senbet & Otchere, 2005).
Accessing global markets for capital, through a well-functioning financial system, lessens a country’s reliance on foreign aid and other forms of external borrowing. It has been pointed out by a number of financial analysts that financial globalization allows for the sharing of local security risks.
Given the benefits associated with having well-functioning financial systems, a number of African countries have endeavored to put in place various measures aimed at developing the financial sector. Financial sector reforms have
therefore been widely used as policy measures to encourage the development
of domestic financial systems as well as the dismantling of barriers to international capital flows. African financial markets have been increasingly integrated with the other world capital markets. The encouraging drive towards globalizing capital flows in Africa has led to the growing relevance of emerging capital markets in the continent (Harris, 1997).
The impact of the capital market performance is determined by a number of elements, which include how financial assets are priced, such as the size of the stock market, market capitalization, number of listed equities, transactions in buying and selling of securities (liquidity) which in this case refers to the volume of transactions and new issues of securities.
This study therefore poses to examine the impact of capital market performance on economic growth in Nigeria.
Statement of the problem
Nigerian capital market has undergone a series of reforms all with the hope of creating a stable economic growth and development. The most recent reform was carried out in order to provide opportunities for greater fund mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal. It is expected as a result of the reform the market can provides variety of financial instruments capable of enabling economic
agents to pool, price and exchange risk. In spite of these vital roles that the reform is expected to play, there is however a great concern on the performance of the Nigerian capital market in relation to the economic growth and development which when viewed from the nature of activities taking place in the market appeared superficial. This may probably be attributed to lack of providing enabling framework that sustained confidence and investors’ protection and also thorough evaluation of factors that are of significance relevance in determining capital market performance.
Although from economic perspective distinction exists between economic growth and development, most of the studies conducted in the area under study fail to take into consideration the difference and also the interrelationship between the two variables. This therefore triggers the need to investigate the situation bearing in mind the distinction and also appropriateness of the methodology under study. To the best of our knowledge, studies conducted in the area show mixed conflicting results and this could probably be attributed to failure to adopt appropriate methodology. Another issue of concern is most of the studies that evaluate capital market performance are either on data of primary market or secondary market and
used to infer on the overall capital market performance but not on the
combination of the two markets’ data in aggregate. This informs the need to evaluate the market on aggregate data basis in order to ascertain how influential it is on the economic growth of Nigeria.