Stock Market-Growth Relations in Nigeria (1984-2016)

Abstract

The study investigated the dynamic and direction of causal relationship between stock market variables and economic growth in Nigeria within a temporal scope 1984-2016. As such, two research hypotheses were tested, these are: no form of dynamic relationship exists between stock market variables and economic growth in Nigeria; and, there is no direction of causal relationship between stock market variables and economic growth in Nigeria. On the theoretical framework of McKinnon-Shaw hypothesis, which led to the finance-growth theory, the study adopted the model in line with that of Ayodeji and Ajala (2010); and as such, proxied economic growth by gross domestic product, and the stock market by its seven key variables, which are market capitalization, all-share index, number of listed equities, number of deals, value of deals, volume of transactions and stock market turnover. Accordingly, time-series data were sourced from the capital market bulletins of the Nigerian Securities and Exchange Commission and annual reports and accounts of the Nigerian Stock Exchange. These were estimated using both Johansen co-integration test and auto regressive distributed lag model to test for long-run relationship, and error correction model to test for short-run relationship in the context of the first research hypothesis. Meanwhile, Pair-wise Granger causality test was employed to test the second research hypothesis. The study found a significant long-run relationship and an insignificant short-run relationship between stock market variables and economic growth in Nigeria. It also found a unidirectional causal relationship between stock market and economic growth in Nigeria. It was, therefore, concluded that, stock market development has perceptible influence on economic growth in the long-run as the engine of long-term growth; and as such, the study confirmed the McKinnon-Shaw hypothesis, thus supporting the finance-growth theory. The study, therefore, recommended that, government should prevent capital flight so that the needed capital funds for long-term productive investments can be retained in the economy. Not only that, the listing requirements of the Nigerian Stock Exchange should be reviewed downward to encourage more companies to get listed, so that more companies can tap into the available public capital that are required for long-term investments that can boost the country's gross domestic product. Also, fund mismatch should be avoided by listed companies so that capital funds required for long-term investments are not committed into short-term projects, thus achieving efficiency in the utilization of available public capital for long-term investments that would maximize long-term profits and/ or returns, and thus increase the country's national income. Finally, government should intensify its efforts on anti-corruption struggle so that capital funds which could have engendered growth are not siphoned.