PROJECT TOPICS AND MATERIALS ON SECURITIES AND EXCHANGE MARKET AND THE NIGERIAN ECONOMY; ADAPTIVE EXPECTATION HPOTHESIS 1990 - 2015
CHAPTER ONE
INTRODUCTION
1.1
BACKGROUND
TO THE STUDY
A
stable securities exchange market plays a major role in the growth and
development of any country. This raises the need to examine the Nigerian
securities exchange market. The country has a growth domestic product (GDP) of
about $510 billion. However, most recently, the country has been experiencing
reduction in growth in the securities exchange market and in its GDP. Gross
domestic product indicators also show that Nigerian securities exchange and the
economy are experiencing slow growth. Due to the bearish mode of the
securitiesexchange market, investors have developed a pessimistic attitude
towards the market (Olusegun, Oluwatoyin, Fagbeminiyi, 2011).
The market has
been performing poorly in the region due to withdrawal of investors in the
market. Despite the fall of the Nigerian securities exchange market, the debt
to GDP ratio of the country is still at 19.39 percent while other countries
maintain their GDP at fifty-six percent. Additionally, the adaptive expectation
hypothesis has a great contribution in the fall of the capital market. Adaptive
expectation hypothesis states that recent information determines the
investors’decision; therefore, investors will expect inflation to be the same
as the previous year (In John, In Makhija & In Ferris, 2015).
The
financial system of any society is the framework within which capital formation
takes place.
According to Odife (1994),
it is the framework within which the savings of some members of the society are
made available to other members of the society. Put differently, it is the
arrangement or mechanism by which the savings surplus units of the economy
transfer their resources to the borrowing deficit units for the purpose of
enhancing economic growth (Okereke – Onyiuke, 2009). The financial system is made up of two major
markets. These are the money market and
the capital market. According to Elakama
(2009), the two markets are at the heart of the financial system.
The
money market is a type of market where short term funds and securities such as
treasury bills, inter-bank deposits, Banker’s acceptance, certificate of
deposits etc whose tenor are usually shorter than or equal to a year are bought
and sold.
In other words, it is a market
where short term capital is sourced. The
capital market on the other hand is a type of market where long term debt
instruments whose tenor exceeds a year are traded. According to Sulaiman (1999), it is a network
of interrelated institutions governed by operational guidelines, which permit
the sale of equity and long term debt.
Furthermore, Al-Faki (2006) describes the capital market as a network of
specialized financial institutions, series of mechanism, processes and
infrastructure that, in various ways, facilitate the bringing together of
suppliers of medium to long term capital for investment in socio-economic
development projects. Instruments traded
in the capital market include equities, debts, government bonds, corporate
bonds, preference shares, debentures, rights etc.
Within
the broad classification of the capital market is the stock market, which
operates as the rallying point for the overall activities in the capital
market. According to Alile and Anao
(1984), the stock market is the pivot around which every activity in the
capital market revolves. Its follows therefore
that without the facilities provided by the stock market, it is doubtful if the
capital market can efficiently perform its expected role of resource
mobilization (Ologunde, Elumilade and Asaolu, 2006).
It is in the light of the above that the stock
market is considered a vital element in the mobilization and allocation of
resources in any modern economy.
The
stock market also known as the stock exchange or equity market performs some
functions that promote the growth of the economy (Osinubi, 2004). Firstly, as an economic institution, the
stock market promotes efficiency in capital formation and allocation. Secondly, the stock market serves as a
veritable tool in the mobilization and allocation of savings among competing
uses which are critical to growth of the economy. Thirdly it enables governments and industry
to raise long term fund for financing new projects and expanding and
modernizing industrial/commercial concerns, thereby increasing the quantity and
quality of investment. Fourthly, by performing
its function of allocating capital efficiently, the stock market, as it
mobilize savings concurrently allocates a larger proportion of it to the firms
with relatively high prospects as indicated by their rate of returns and level
of risk. The importance of this function
is that capital resources are channeled by the mechanism of the forces of
demand and supply to those firms with relatively high and increasing
productivity, thus enhancing economic expansion and growth. In recognition of the importance of the stock
market in economic development, many developing countries have launched stock
exchanges during the past few decades. This explains the drive toward the
establishment of stock exchanges in African countries especially during the
past two decades, with new stock markets established in Ghana, Malawi,
Swaziland, Uganda and Zambia. Prior to
1989, there were just eight stock markets in Africa, of which three were in
North Africa and five in Sub-Sahara Africa.
At present, more than 50% of the fifty four African countries operate
stock exchanges, accounting for over twenty-two stock exchanges in Africa
(Komo, 2008)
1.2 STATEMENT
OF RESEARCH PROBLEM
In the annals of
the Nigerian Capital Market, year 2009 will remain indelible due to its dismal
performance. The banking reforms, global financial meltdown, change of
leadership of the Central Bank of Nigeria (CBN) and the Securities and Exchange
Commission (SEC) policies and counter policies within and outside the market inter
alia are some of the factors that would make 2009 not to be forgotten in a
hurry by many investors and even market operators. These factors made the
market to remain on a free-fall during the year under review. For investors in
the market, it was an unpalatable year as by mid December 2009, average
year-to-date return at the market stood at a negative of 35 per cent, an
extension of the average drop of 46 per cent recorded in 2008.
This implies
that an average investor with portfolio spread across the market recorded more
than 35 percent loss in its market value during the period. And for those that
invested in financial stocks had an average of more than 44 percent; those in
the insurance were the worst hit with an average loss of about 64 percent while
petroleum stocks generally lost some 61 percent.
In 2008, a lot
of companies came into the market to raise money and some promised to come and
list. But up till now, they have not listed; that is to say, a lot of people’s
money is locked up somewhere and they are not having real value for their
money, that is number one. Two, when we had the market bubble, that really
affected the performances of most of these companies in terms of giving good
returns on investment to the stakeholders.”
In spite of the
many weaknesses, there is silver linings for the market. But this can only be
manifest when a concrete step is taken towards the reality of the take-off of
market markets, the new rules on share buy back, reduction in costs of
transactions, comprehensive periodic reporting requirements, publication of
periodic forecasts of quoted companies, a strict regulatory surveillance by
both NSE and SEC among others that would reinforce investors confidence in the
market.
1.3 OBJECTIVES OF THE STUDY
The main objective of this study is
to empirically study the relation between Nigeria securities exchange market
and economic growth in Nigeria. Other objectives includes below:
·
Assess development
levels of the Nigerian securities exchange market in the past thirteen years.
·
Find out the role of the Nigerian
securities exchange market in accumulation of funds and development of the
gross domestic product.
·
Find out ways in which the Nigerian
securities exchange affects the Nigerian economy.
·
Recommend on
appropriate and useful ways that can aid in improvement and efficiency of the
Nigerian securities exchange market.
1.4 RESEARCH
QUESTIONS
The following research questions
will be imperative to the success of this study:
·
How does the adaptive
expectation hypothesis affect the Nigerian securities exchange and economy?
·
What impact does the
Nigerian securities exchange have on the Nigerian economy?
·
What is the
relationship between the securities exchange and the adaptive expectation
hypothesis?
·
How is the progress of
the Nigerian securities exchange and economy from 1990 to 2015?
1.5 HYPOTHESES
OF THE STUDY
A research hypothesis is a scientific
statement expressing the relationship between two or more variables which is
meant to be tested. In the light of the
primary objective of this study, the following hypotheses have been formulated
H0: Securities exchange market; a test of adaptive expectation
hypothesis has no significant relationship with economic growth in Nigeria.
H1: Securities exchange market; a test of
adaptive expectation hypothesis has significant relationship with economic
growth in Nigeria.
1.5 SIGNIFICANCE
OF THE STUDY
The
Nigerian securities exchange is a market place but many people see it as
complex due to its trading methods. From this perception, many perceive it to
belong to the few literate. Due to this, the study will assist people in
understanding the role and functions of the Nigerian securities exchange. It
will further illustrate and bring out clearly the impact of the Nigerian
securities exchange on the Nigerian economy. The study will also show the
success and failure of the Nigerian securities exchange between the year 2000
and 2012. It will further show the problems the securities exchange faces in
its daily activities (Olusegun, Oluwatoyin, Fagbeminiyi, 2011).
In addition,
investors largely rely on the history of the securities exchange to make their
future decisions. Therefore, the study will be very important in explaining the
adaptive expectation hypothesis and its impact on the Nigerian securities
exchange and Nigerian economy. The study will also aim at enlightening the
Nigerian investors on the behavior of the Nigerian securities exchange and the
way they can utilize the adaptive expectation hypothesis to their advantage.
Finally, the data and information collected will help in making recommendations
to the investors, public, Nigerian securities exchange managers, security
brokers, economy analysts, and future researchers (Ifionu, Omojefe, 2011).
1.6 SCOPE
OF THE STUDY
In view of its primary objective, this
study focuses mainly on the activities of the Nigerian securities exchange
market without detailed reference to other markets in the capital market. The study covers activities of the Nigerian
stock market for a period of 26 years, from 1990 to 2015. The choice of this period is anchored on the
fact that it covers both the relatively small and high activities performance
of the market.
1.7 LIMITATIONS
OF THE STUDY
This research was limited by certain
constraints which include difficulty in sourcing data from certain relevant
organization, non availability of data on certain variables, restrictions on
accessing certain materials on the internet and insufficient financial
resources for the study. Lastly, this study was also constrained
by inadequate time on the part of the researcher, since attention had to be
given to other course work.
1.8 DEFINITION OF TERMS
Investment:
The act of buying of shares with the expectation of making profit.
Transparency:
Extent to which, the trading information is available to the public.
Diversification:
A way of reducing investment risk through increase in the number of securities
Broker:
An organization or individual who handles the order of buying and selling of
shares for a commission
Economic
Growth: This
refers to the increased over time of an economy’s capacity to produce those
goods and services needed to improve the well-being of the citizens in
increasing number and diversity. It is the study of the process by which
productive capacity of the economy is increased over time to bring about rising
level in national income.
Economic
Development: This
is a multi-dimensional process involving the provision of basic needs,
acceleration of economic growth, reduction of inequality and unemployment,
eradication of poverty as well as changes in attitude, constitution and
structure in the economy.