CHAPTER ONE INTRODUCTION

1.1 Background to the Study Stock markets are markets for trading long term financial securities, including ordinary shares, long term debt securities such as debentures, unsecured loan stock and convertible bonds. Government bonds and other public sector securities are also traded on stock markets. A good functioning stock market is vital in the contemporary economy, in order to achieve an efficient transfer of monetary resources from those who save money toward those who need capital and who will succeed in offering it a superior utilisation; the stock market can influence significantly the quality of investment decisions. Murinde (2006) argues that the structure of any stock market has three components and plays three vital roles. First, the primary market, for new issues by firms and other institutions, long-term funds can be raised by companies from those with funds to invest, such as financial institutions and private investors. Secondary market is the one in which shareholders can resell their existing securities to other interested buyers on the stock exchange or to buy additional ones to increase their portfolios. The third is the derivative market, which serves the exchange of securities created by the exchange and whose value is derived from the underlying securities. An important part of the structure of the stock market is its complementarily role to the financial institutions. The argument by Demirguc-Kurt and Levine (1996) is that the existence of an active stock market increases the debt capacity of firms; in this context, equity markets and financial intermediaries complement one another so that an active stock market results in increased volumes of business for financial intermediaries. In addition, it has been argued that well developed stock markets facilitate reforms in the financial sector of any economy (Murinde, 2006). Similar conclusions are reached by Demirguc-Kurt and Maksimovic (1996), who opined that stock market development tends to increase the volume of other business. Some emerging stock markets have recorded a dramatic increase in foreign investment due to an expansion in privatisation listings, the use of bond instruments in international debt settlements and some successful implementation of economic stabilisation programmes. However, some very small, less developed stock markets, which are defined as frontier markets by the International Finance Corporation (2000), have not received much of the foreign inflows. These markets have become consequently segmented from global markets. The Nigerian Stock Exchange is the only stock market institution in Nigeria, where securities (shares, stocks and bonds) can be bought or sold (NSE 2009). The Nigerian stock market is viewed as a complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the Nigerian economy comprising households, firms, and government are mobilized, harnessed and made available to various sectors of the economy (Nyong, 1997). The development of the Nigerian stock market provides opportunities for greater funds mobilization, improved efficiency in resource allocation and provision of relevant information for appraisal (Inanga and Emenuga, 1997). For the twenty years covered by the study (1989 - 2008) the market capitalization increased from N12.8 billion in 1989 to N13, 294.6 billion in 2007. The value traded increased form N 610.3 million in 1989 to N1, 679,138.7 million in 2008. Number of deals on the Nigerian stock market floor increased from 33444 deals 1989 to 3535631 deals in 2008. The number

of listed company on the Nigerian stock market increased from 111 to 213. According to Osinubi (2004) there is need for rapid development of the Nigerian stock market, so that the optimum benefits of linkages between stock market and economic growth can be realized in Nigeria. Given that the stock market provides some services that have an impact on economy, this study, therefore, tends to assess Nigerian stock market development and investigates whether there is any relationship between the stock market development and GDP in Nigeria. Multiple regressions using Least Square method has been adopted to make analysis on secondary data covering the period 1989 to 2008.

1.2 Statement of the Problem The financial system of any economy is seen to be divided between the financial intermediaries (banks, insurance companies and pension funds) and the markets (bond and stock markets). In promoting economic growth, a key factor is seen to be a healthy development of a nations financial sector, which in turn improves the private sectors access to services such as bank credit, equity capital, payments and risk management services. Stock market development has assumed a developmental role in global economics and finance following the impact they have exerted in corporate finance and economic activity. For instance stock markets, due to their liquidity, enable firms to acquire much needed capital quickly, hence facilitating capital allocation, investment and growth. Stock markets also help to reduce investment risk due to the ease with which equities are traded. Stock market activity is thus rapidly playing an important role in helping to determine the level of economic activities in most economies. Moreover, the work of Demirguc-Kurt and Levine (1996), Singh (1997) and Levine and Zervos (1998) found that stock market development plays an important role in predicating future economic growth in situations where the stock markets are active. The arguments of Demirguc-Kurt and Levine (1996) indicate that economies without well-functioning stock markets may suffer from so many financial imperfections. An empirical study by Levine and Zervos (1998), King and Levine (1993), Sarkar, (2005) and Demirguc-Kurt and Maksimovic (1996) showed there is relationship between various indicators of stock market development and GDP. Other scholars who analyze the stock market development traditional indicators and their relationship with Gross Domestic Product (GDP) include Chakraborty, (2008), Claessens, Klingebiel, and Schmukler (2006) and Brasoveanu, Dragota, Catarama, Semenescu (2007). Adjasi and Biekpe (2005) have found a significant positive impact of stock market development on GDP in countries they classified as upper middle-income economies. Also Chen and Wong (2004) elaborates that the connection between stock returns and output growth and the rate of stock returns is a leading indicator of output growth. Arestis, Demetriades and Liuntel (2001) used time-series of five industrialized countries and conclude that stock markets play a role in growth. Various studies such as Atje and Jovanovic (1993); Filler, Hanousek and Campos (1999) and Aruwa (2009) supports the view that stock markets development has significant relationship with economic growth. With well-functional financial sector or banking sector, stock markets can give a big boost to economic development (Roussean and Wachtel, 2000; Beck and Levine, 2003). Bahadur and Neupane (2006) conclude that stock markets fluctuations predicted the future growth. The empirical evidence, however, strongly showed that greater stock market liquidity boost or at least precedes economic growth. Apart from the view that stock markets may be having real impact on growth, there are theoretical constructs that show that stock market development has negative relationship with GDP. For instance, Stiglitz (1985 and Bhide (1993) opined that stock markets can harm economic growth. Their argument is based on the

fact that liquidity in the stock may reduce savings rates. They also argue that stock market can negatively affect GDP due to dispersed ownership which will lead to poor corporate governance that will affect the performance of the listed firms. Ironically, in many countries where there are investment opportunities, there is inadequate access to finance, particularly risk capital and this underlines the need to accelerate the development of local stock markets (International Finance Corporations 2000). In addition to this, Pardy, (1992) also recognized the need for the development of the stock market for the less developed economies. He argued that stock markets could significantly raise the level of domestic savings and contribute to a more efficient allocation of such savings among the competing use of the savings. Despite the size and illiquid nature of the some stock markets, their continued existence and development could have important implications for economic activity. This is because even in less developed countries stock markets are able to mobilize domestic savings and able to allocate funds more efficiently. Thus, stock markets can play a role in inducing growth in less developed countries. Considering the contributions of the developed stock markets to their economies, this has led researchers to focus on how the stock markets develop and affect the developing economies, so that these economies also enjoy the benefits of the stock markets. There was a remarkable performance in the Nigerian stock market activity in recent years, despite the fact that the market is still small and illiquid when compared with those in some developed countries. Consequently, analyzing the relationship between stock market development and GDP is important in designing economic development programmes. However, due to the fewness of empirical research in the area of stock market development and its impact on GDP in developing countries such as Nigeria, this study attempts to fill in this gap by following the work of the above mentioned studies. The study uses three measure of domestic stock market development: size (market capitalization ratio), market liquidity (turnover ratio and value traded ratio), all as a percentage of GDP, with focus on how the Nigerian stock market developed in recent time and its relationship with GDP. Based on the above mentioned issues, the following research questions will guide this study: (I). What is the relationship between the Nigerian stock market capitalization ratio and the Growth Domestic Product (GDP)? (II). What is the relationship between the Nigerian stock market turnover ratio and the Growth Domestic Product (GDP)? (III). What is the relationship between the Nigerian stock market value traded ratio and the Growth Domestic Product (GDP)?

1.3 Objectives of the Study The main objective of the study is to examine the Nigeria stock market development and relationship between market development and GDP from 1989 2008. The specific objectives of this study are: (I). To determine the relationship between the Nigerian stock market capitalization ratio and the Growth Domestic Product (GDP). (II). To determine the relationship between the Nigerian stock market turnover ratio and the Growth Domestic Product (GDP).

(III). To determine the relationship between the Nigerian stock market value traded ratio and the Growth Domestic Product (GDP). 1.4 Research Hypotheses Some of the following hypotheses were formulated based on the research problem statement: (I). There is no significant relationship between the Nigerian stock market capitalization ratio and the Growth Domestic Product (GDP). (II). There is no significant relationship between the Nigerian stock market turnover ratio and the Growth Domestic Product (GDP). (III). There is no significant relationship between the Nigerian stock market value traded ratio and the Growth Domestic Product (GDP).

1.5 Significance of the Study The growing importance of stock markets in developing countries around the world over the last few decades has shifted the focus of researchers to explore the stock market development indicators. The motivation is derived primarily from the obvious policy implications of the findings of such studies for the developing economies such as Nigeria. An empirical study by Levine and Zervos (1998), King and Levine (1993), Demirguc-Kurt and Maksimovic (1996) showed policy implications of such study by examining the relationship between stock market development and GDP. The significance of this research work to the relevant literature lies first of all, in focusing the Nigerian stock market developments in recent times. Secondly, this study focuses only on stock market development and its relationships with GDP as evident in the study Levine and Zervos (1996) and Brasoveanu, Dragota, Catarama, Semenescu (2007). It is also expected that the findings would be an added knowledge to the area of this research work. In particular, academic researchers, operators of the Nigerian stock market (both the regulators and investors) are expected to benefit from the findings. These include Central Bank of Nigeria, Nigerian Stock Exchange, Stock broking firms; Registrars, Security and Exchange Commission and other players of the Nigerian capital market.

1.6 Scope of the Study This study will cover transactions on the floor of Nigerian Stock Exchange from 1989 to 2008; market capitalization ratio, and value traded ratio and turnover ratios are the specific variable to measure. All the data used in this study are expected to cover only 1989 to 2008. This period is deemed reasonable enough to analyse the development in the stock market and how it has contributed to the economy. Thus, the study is restricted to examining relationship of the Nigerian stock market development or performance indicators and the GDP.

CHAPTER TWO LITERATURE REVIEW AND THEORETICAL FRAMEWORK 2.1 Introduction In this chapter some related work are reviewed, the major findings, methodologies and conclusions of existing research works related to this study are carefully synthesized. Literature related to financial market, capital market, particularly stock market development and relationship to economy, with emphasis on developing nations such as Nigeria are reviewed. This is to give an idea of specific areas of the study that require new or additional research work. 2.2 Overview of the Nigerian Financial Market Many studies were conducted on the financial market development, most of them cross country regression. In general financial market deal with financial assets and liabilities of various maturities and consist of institutions, instruments, rules and regulations which guide the mobilization of fund from surplus units of the economy to the deficit units. In other words, it is a forum for the exchange of any kind of financial products, which may be represented by a physical location or by sharing data on prices and volume transacted where professionals are among the participants of the market process (Masha, Essien, Musa, Akpan and Abeng, 2004). Olowe (2008) viewed financial market as a market that enables efficient allocation of funds from surplus units of the economy to the deficit units. The role of financial market is institutional intermediation in capital flows (Subramanyam, 2007). It was argued by King and Levine (1993) that the level of financial intermediation is a good predictor of long-run rates of economic growth, capital accumulation, and productivity improvements. According to Classens (1995) financial development of any country provides a way for growth and development of the country. A study by Demirguc-Kurt and Levine (1996) showed that, an overall growth and development in any country or region are related to, and to a large extent caused by, the development of financial market (capital and money markets). They argued that lack of these markets will make it impossible for investor to invest. Indeed, some scholars have opined notably Stiglitz (1991) and Bhide (1993) that they contribute little to economic efficiency and may even be welfare-decreasing. Financial Markets are defined as a network of individuals, institutions and instruments working together in the process of mobilizing and transferring funds from the surplus to the deficit units of the economy. Financial markets are made up of the money and capital and markets. The length of time money is invested or raised determines the segment of the financial market to which it belongs (SEC, 2007). Money market and capital market are the major divisions of the Nigerian financial market; they determine the volume of credits available as well as attract savings and set interest rates and securities prices. Nigerian financial markets in terms of structure are unique and different from most of the financial markets of other advanced countries. According to Abudu, Bamidele, Okafor and Adamgbe (2004), Nigerian financial market is unique and different due to the nature of the economy, the agrarian nature of production, and communal restriction and laws that guide saving mobilization. In addition, the low level of technological transformation as well as the economy is cash kind, which has hindered the growth of the market to global challenges. Some researchers agued as shown in some works on low developing nations like Nigeria, financial sectors in developing countries do not intermediate efficiently between savers and investors (Ojo, 1986, Kitchen 1988, Fry 1988 and

Bhatt 1986 as cited in Ojo 2007). Some of the reasons include financial repression, poor adaptation and orientation of financial system, market structure and management performance of both the financial intermediaries and financial regulators (Ojo 2007).

2.2.1 Structure of Nigerian Financial Market According to Abudu, Bamidele, Okafor and Adamgbe (2004) Nigerian financial market structure is unique and different from those of most other countries. The structure of Nigerian financial market is broadly divided into money market and capital market, of which money market deals with short term securities while capital market deals with long term securities (Ebajemito, Kama, Salam and Anyakoha, 2004). Capital markets made it possible to develop projects that required large capital injections for long periods before the projects ultimately yielded profits (Muhtadi and Agarwal, 1997). According to Odoko, Adamu, Dina, Golit and Omanukwe (2004), the Nigerian capital market is structured into the stock market and commodities market. Nigerian stock market is one of the divisions of the Nigerian capital market that provides facilities for mobilising and dealings in medium and long term funds. Commodities market is a segment of the Nigerian capital market where commodities are traded such as agricultural product, oil products, and precious metals. The Central Bank of Nigeria (CBN), which is the apex regulatory authority in the financial system, has through its monetary policies the responsibility of creating stable economic conditions in the country. The CBN has direct control and supervision over government regulatory agencies, as well as banking and non-banking financial institutions. Banking institutions are those who obtain their funds from deposits while non-banking institutions obtain theirs from other than deposits. Regulatory agencies include the Security Exchange Commission (SEC), and the Nigerian Deposit Insurance Corporation (NDIC). SEC is at the apex of the capital market and its objectives are mainly the protection of investors and capital market development. In order to achieve these objectives, the commission has several powers. It regulates the market against malpractice of security trading and assures that information flows smoothly. It encourages economic development by providing incentives for domestic savers and by attracting foreign capital for domestic investments. It determines the time, amount and prices of new issue shares so that excess demand does not arise at any particular time. It registers the institutions and individuals involved with the market-making so that investors have the necessary assurance that the market is governed by proper standards of conduct. SEC has the function of de-listing a firms securities for rule violations. It also has control over mergers/acquisitions and all other forms of business combinations. By organizing workshops, symposiums and international conferences, and also through co-operation with other regional and international organizations and markets, it actively searches for stimulating ideas on the basis of which it initiates policy changes that could enhance the growth of the Nigerian security market. The NDIC is the insurer of all deposit-taking institutions in the financial system. It is empowered to examine the books and affairs of insured banks and all deposit-taking financial institutions. Yohannes (1999) observed that the availability of financial capital is a prerequisite for the development and transformation of any nations economy. Finding and efficiently managing this scarce resource is best facilitated by the existence and appropriate functioning of financial institutions, also known as institutional investors. These institutional investors are of three kinds: banking institutions, specialized banking, and non-bank financial institutions. Banks mobilize financial resources from the surplus sectors of the economy and channel such

funds to the deficit units of the economy through the extension of loans and credits. Specialized banks provide loans for projects with medium to long maturity periods. The specialized non-bank financial institutions are those institutions that fall into the category of non-deposit-taking financial institutions or their agents. They include insurance companies, national provident funds, stock broking firms, pension fund administrators, issuing houses, registrars, building societies, venture capital companies and the Nigerian Stock Exchange (Yohannes, 1999).

2.2.2 Functions of Nigerian Financial Market The importance of well functioning financial market cannot be over emphasized, for an economy to grow and develop a sound financial market is needed. Many studies showed the development of financial market is positively related to economic growth and development (Abudu, Bamidele, Okafor and Adamgbe 2004). According to Nkwanko (1991) financial market provides services that are essential to any economy by facilitating trade and offer access to a variety of financial institutions. Ojo (2007) outline the functions of the Nigerian financial market, Economic and financial development, Financing systems and economic development, and Expected role of financial sector in economic development. The roles of financial market are financial intermediation, monetization and capital formation for economic improvement (Ebajemito, Kama, Salam and Anyakoha, 2004). Grill (1975) argues that financial institution performed three functions; monetary intermediations which made up of central banks and commercial bank, non monetary intermediation which made up of various specialized institutions such as saving and loan institutions, pension funds, mutual funds, development banks, the last is securities market where stocks and bond are traded. Financial market should facilitate the achievement of the entire financial system of any country, which includes provision of efficient banking services, high mobilization of savings and channelling surplus fund to deficit unit as capital (Okigbo, 1981).

2.3 Nigerian Stock Market Finance is the life-blood for any business enterprise. Funding for economic activities must be adequate and appropriate. The issue of adequacy is easily comprehended as the evidence of under-funded and consequently abandoned projects abound everywhere. What is however not clear to many is that some otherwise viable projects have also collapsed due to the use of short-term funds (money market), usually in the form of bank loans to finance projects with long gestation periods. The need to repay such loans before the projects can generate sufficient funds to sustain them had often led to the collapse of such businesses. That is why stock market is more appropriate since it facilitates the mobilization and allocation of medium and long-term funds through the issuance and trading of financial instruments. Such instruments, otherwise known as securities, include equities and bonds. While equities represent ownership stake in a company which issued them, bonds are debt instruments with the principal and interest usually payable to the bondholder at specific periods. The stock market is made up of two inter-related segments primary and secondary market. The primary market is the mechanism for raising funds through the issuance of new securities. The secondary market essentially provides facilities for trading in (transferring) already issued securities, thereby creating liquidity in the market (Olowe, 2008). Thus, quoted securities are usually more attractive as investors can more easily turn them to cash

whenever they so desire. As the major source of appropriate long-term funds, the stock market is obviously crucial to any nations economic development. Specifically, the stock market can facilitates economic growth by, among other things, mobilizing savings from numerous economic units such as governments, individuals and institutional investors for users such as governments and the private sector. It also improves the efficiency of capital allocation through a competitive pricing mechanism. In developed financial markets, and increasingly in developing financial markets, stock markets are taking centre stage in financial markets. It has been argued that stock markets stimulate investments because as organized markets, they recognize and fund productive projects that lead to economic growth and ensure proficient allocation of capital (Caporale and Soliman, 2004). A study conducted by Mutenheri and Green, (2003) showed that the difference between prereform and post-reform era in the countrys financial system (especially stock market) is significant and that the reform has achieved partial success in increasing the capital mobilization and improving the development of the market. The players of the market are the regulators and the operators who act as intermediaries between the providers of the funds and the fund users. They include the Central Bank of Nigeria, the Securities Exchanges Commission, Nigerian Stock Exchange, Brokers/Dealers, Issuing Houses, and the Registrars and Investment Advisors. In pursuance of making funds available for economic development and growth; the Securities and Exchange Commission was established in 1979 by the Securities and Exchange Commission Decree (this decree was re-enacted in 1988 as Securities and Exchange Commission Decree no. 29 of 1988, for the purpose of protecting the investors as well developing the capital market). A detailed review of the Nigerian capital market was carried out in 1996. This led to the enactment of the Investment Securities Act (ISA) No.45 of 1999 (and the regulations made there under). This Act replaced the Securities and Exchange Commission Decree No.29 of 1988. It was aimed at providing a more efficient and viable capital market positioned to meet the country's economic and developmental needs. As most stock market in the world, Nigerian stock market is also divided into primary and secondary market. In Nigeria, the secondary stock market is divided into dealers market and centralized auction market. Dealers market deals with the trading of unlisted securities on the Nigerian stock exchange floor. Centralized auction market is an organized secondary market for buying and selling of securities, known as Nigerian Stock Exchange (Odoko, Adamu, Dina, Golit and Omanukwe, 2004). The establishment of stock markets in Nigeria is expected to boost domestic savings and increase the quantity and quality of investment. More generally, stock markets are seen as enhancing the operations of the domestic financial system in general and the capital market in particular (Kenny and Moss, 1998). Critics, however, argue that the stock market might not perform efficiently in developing countries and that it may not be feasible for all African markets to promote stock markets given the huge costs and the poor financial structures (Singh, 1999). Stock markets also provide an avenue for growing companies to raise capital at lower cost. In addition, companies in countries with developed stock markets are less dependent on bank financing, which can reduce the risk of a credit crunch (Yartey and Adjasi, 2007). Stock markets therefore are able to positively influence economic growth through encouraging savings amongst individuals and providing avenues for firm financing. The stock market is supposed to ensure through the takeover mechanism that past investments are also most efficiently used (Kumar, 1984). 2.4 Regulators of the Nigerian Stock Market

The regulatory bodies of the Nigerian stock market consist of Central Bank of Nigeria, Securities and Exchange Commission, and Nigerian Stock Exchange (Odoko, Adamu, Dina, Golit and Omanukwe, 2004). 2.4.1 The Role of Central Bank of Nigeria (CBN) As with the money market, the central bank is a major player in the Nigerian stock market. Central bank of Nigeria is the apex regulatory authority of the Nigerian financial market (money and capital markets). Also, CBN lays down terms and regulations for issuance of Federal Government stocks thereby improving stability in the market. The CBN participates actively in setting up the development finance institutions and is also at the forefront in enhancing the payment and settlement system. 2.4.2 The Role of Securities Exchange Commission (SEC) The Securities and Exchange Commission is the apex regulatory agency for the Nigerian stock market. Originally established by SEC Decree 29 of 1988, the Commission has evolved over the years with its current enabling law being the Investment and Securities Act (ISA) 45 of 1999. The Commission is basically charged with the dual role of developing and regulating the market. Some of its specific functions as listed in section 8 of the ISA are to: a) Register and regulate Securities Exchanges, Capital Trade Points, Futures, Options, and Derivative Exchanges, Commodity Exchanges and any other Recognized Investment Exchanges. b) Register Securities to be offered for subscription or sale to the public. c) Render assistance in all aspects including funding as may be deemed necessary to promoters and investors wishing to establish Securities Exchanges and Capital Trade Points. d) Facilitate the establishment of a nation-wide system for secondary trading in the capital market. In carrying out its developmental role in the market, the Commission has taken various steps and introduced some measures. For instance, in order to create more awareness of the opportunities in the market and thereby enhance participation by the populace, SEC has engaged in public enlightenment campaigns through radio and television programmes, organizing seminars, workshops and conferences and various publications. It has also, over the years, sponsored/promoted interactive sessions that are aimed at developing new capital market products. It has been sponsoring the introduction of capital market studies at both secondary and tertiary educational levels. The mandate to protect investors in the market, to minimize the risk of their becoming victims of any malpractice is a major objective of the Commission. According to SEC (2007) the Commission adopts the following tested and proven tools to achieve these objectives,: a) Registration: Registration is the entry point to the Nigerian capital market as it ensures that only proper and fit persons are admitted to operate in the market and that only securities for which all pertinent and material information have been provided that will enable rational investment decisions are allowed to be issued and offered to investors. b) Surveillance: The ISA empowers SEC to maintain surveillance over the securities market in order to ensure orderliness, fairness and equitable dealings in securities. Hence, the Commissions staffs are always present to monitor activities on the floors of the Stock Exchanges as well as to monitor the activities of other operators in the market. c) Investigation: The Commission is also empowered by the ISA to embark on the investigation of any capital market operator as well as any company with regards to securities issuance. Such investigations may be triggered off by petitions to the Commission, media reports etc. d) Enforcement: The Commission, after investigating and ascertaining the veracity of any case of malpractice by any market participant may apply sanctions against such offenders. For instance, registration certificates of erring market operators may be suspended or the Commission may institute a legal action to enforce compliance. e) Rule Making: Pursuant to the ISA the Commission makes rules for operating in the market. Such rules are subject to revision as the need arise. 2.4.3 The Role of the Nigerian Stock Exchange (NSE)

The NSE is a self regulatory organization with overseeing responsibility on the professional activities of its members, such as stockbrokers who trade on its floors. The Nigerian Stock Exchange is required to provide periodic report of its activities to the Securities and Exchange Commission. Being a non-statutory body, its rules, which must be approved by SEC, lack the force of law. The NSE is a market where trading activities for securities take place. Since the main interest here is to investigate the stock market, detailed examination of this important market will be done later. 2.5 An Account of the Nigerian Stock Exchange The hub of Nigerian capital market is the Nigerian Stock Exchange, which was started in 1961 and was formerly called the Lagos Stock Exchange. Trading commenced in 1961 with 0.3 million shares worth N1.5 million in 334 deals and grew steadily to a value of N16.6 million in 634 deals in 1970. The implementation of the Nigerian Enterprises Promotion Decree of 1972 and 1977 enhanced public participation in the stock market. Similarly state government started patronizing the market to raise long term funds for long term projects such as Bendal state government bond in 1978. During the early 1980 to late 1980s the market witnessed some fluctuations, which was settled around 1993, due to the participation from private sector (Abudu, Bamidele, Okafor and Adamgbe 2004). The number of listed company rose from 9 in 1961 to more than 200 now while new issues valued at N43.7 million in 1971 increased to N150 billion (NSE 2008). Another index of size is number of quoted securities, which rose from only 9, 3 equities and 6 government securities in 1961, to 153 in 1980 with 90 equities, 13 debentures, and 50 government securities. The number of listed securities rises in 1994, to 276 including 29 government stocks, 70 industrial bonds and 177 equities (NSE, 2003). In 2006 the number of listed company was 202, number of listed securities 288, market capitalization N5.12 trillion (NSE 2006). The market capitalization as at the end of December 2008 was N 9.56 trillion up from N4.5 billion in 1980, the NSE All-Share Index 31,450.78, Total Turnover Value N2.4 trillion, number of Listed Companies 213, number of Listed Securities 301 (NSE 2008). According to NSE (2009) Nigerian Stock Market indicators recorded downward movements. In addition, a significant portion of the funds that left the stock market for the Private Placement Market in 2007/8 remained locked-in, as many of the issuers have not yet applied to The Nigerian Stock Exchange for listing. Turnover on the Exchange closed the year at N685.72 billion, down by 71.2% from the N2.4 trillion recorded in 2008. Average daily activity dropped from 775.65 million shares worth N9.55 billion in 2008 to 414.73 million shares valued at N2.8 billion in 2009.The bulk of the transactions were in equities, which accounted for N685.3 trillion or 99.94% of the turnover value compared to N2.376 trillion or 99.85% recorded in 2008. Transactions in the industrial bonds sector accounted for N412.8 million or 0.06% compared to N3.53 billion or 0.15% in 2008, while transactions in the State Government bonds sector were very minimal, accounting for only N119, 530. The Preference Stocks subsector was inactive in 2009 (NSE 2009). Furthermore, turnover on Federal Government bonds on the Exchange was idle, while a turnover of N18.51 trillion in 134,120 deals was recorded in the over-the-counter (OTC) market for Federal Government bonds, as against N10.44 billion in 78,248 deals recorded in 2008. Investors traded rights in two companies, compared to four companies in 2008. In all, 136 deals valued at N46.04 million were executed in this market segment in 2009, down by 87.1% on the N357.05 million values of transactions in the previous year. The companies whose rights were traded during the year are Cadbury Nigeria Plc and Eterna Oil & Gas Plc (NSE 2009).

The total market value of 266 securities listed on the Exchange dropped by 26.5%, from N9.563 trillion to stand at N7.03 trillion at the end year 2009. The decline in market capitalization resulted mainly from equity price losses, and the delisting of 64 securities, 11 equities and 53 fixed income securities. By the end 2009, the market capitalization of the 216 listed equities accounted for N5 trillion or 71.04% of the aggregate market capitalization. In 2008, 213 equities accounted for N7 trillion or 73.1% of market capitalization. Also, by the end of 2009, seven subsectors recorded increased market capitalization of between 6% and 69.3%, while 26 subsectors suffered a reduction in market capitalization of between 6.4% and 77.3%. Two subsectors (Machinery Marketing and Aviation) did not record any change in market capitalization (NSE 2009). The NSE-30 All-Share Index (ASI) dropped by 33.8% or 10,623.61 points to close at 20,827.17. The NSE ASI had in 2008 dropped by 45.8% or 26,539.44 points to close at 31,450.78. The performance of the Index reflects a significant reduction in prices of equities during the year. By year end, 23 stocks recorded price appreciations and 159 stocks recorded price declines while the prices of 35 remained constant. In 2008, 78 stocks recorded price appreciations and 111 stocks recorded price declines while the prices of 24 remained constant. As expected, the new NSE-30 Index showed resilience by dropping only 25.44 points or 3% to close the year at 827.99. This is due mainly to the indexs broad-based structure and limited exposure to any sector in particular two key requirements for products such as Exchange Traded Funds (ETFs) and derivatives. The Exchange also introduced four sectoral indices during the year. By year end, however, all the four sectoral indices had depreciated, the NSE Food/Beverage Index dropped by 32.63 points or 5.83% to close at 526.71; the NSE Banking Index dropped by 159.45 points or 32% to close at 339.32; the NSE Insurance Index dropped by 391.59 points or 61.13% to close at 249.01; and the NSE Oil/Gas Index dropped by 433.52 points or 60.1% to close at 288.06 (NSE 2009). When compared with the preceding five years, the Primary market was less active during 2009, in terms of number of applications received and issues offered for public subscription. This can be attributed to the liquidity crisis and the overriding pessimism of investors. The Exchange considered and approved 30 applications for new issues valued at N279.25billion or 1.2% of GDP, as against 70 applications for new issues valued at N2.6 trillion or 11.3% of GDP in 2008 (NSE 2009). Non-bank corporate issues accounted for 71.5%, with 25 applications valued at N199.65 billion while the banking sector accounted for 3.6%, with one application valued at N10.1 billion. State Government bond issues accounted for N69.5 billion or 24.9% of the total amount approved during the year. Of the non-bank applications, the Foreign Listings and Insurance subsectors accounted for N27.5 billion and N33.22 billion or 9.84% and 11.9%, respectively, of total applications considered. No new IPOs were approved in 2009 (compared to N1.01 trillion in 2008) while N14.7 billion was raised through supplementary issues, N31.72 billion through rights issues, and N71.74 billion through bonds issue, including four State Government Bonds (NSE 2009). According to NSE, (2009) the Exchange implemented certain initiatives in 2009 to broaden participation in our market, expand services, improve liquidity, and generally propel the market to greater heights. These initiatives are in the important areas of capacity building, investor education, international cooperation, and new products development. a) Market Technology Nigerian Stock Exchange completed an upgrade of Horizon, NSE trading platform, to the latest version. The upgrade comes with improved functionalities that would impact positively on trading on the Exchange, especially equities, derivatives, bond trading and surveillance.

NSE surveillance capability currently detects any price manipulation in the market. Like a dynamic organization, NSE already considering the transition from the current software platform to a bigger platform, in view of expanding its operations. In this regard, NSE has commenced negotiations with the London and New York Stock Exchanges in the selection of a more suitable platform for implementation within the next two years. b) Dissemination of Market Information During the year 2009, the Nigerian Stock Exchange concluded arrangements with renowned global news media Powerhouses, such as Thomson Reuters and Bloomberg for dissemination of real-time market data to the global investment community. This service is designed to compliment what is provided by NSE official Website and local Data Centre. Data for investors and market operators include the bid/ask prices, volumes, latest trades and market depth information on equities and indices listed on the NSE. Nigeria Stock Exchange is the second African exchange to be switched on by Reuters for real-time data, following Kenyas Nairobi Stock Exchange a direct acknowledgement of the development of the stock market in Nigeria (NSE, (2009). c) New Products In further appreciation of the efforts by the Nigerian Stock Exchange to create products that would take our market to a global audience, the Nigerian Stock Exchange has been approached by Bloomberg to co-brand all the newly-created indices, i.e., NSE-30 and the 4 sector indices. The Bloomberg branding will further enhance the profile of these indices and thereby give institutions the confidence to create products based on these indices, knowing that they will be displayed to a global investor base via the Bloomberg screens worldwide. The arrangement will also develop a revenue stream for the Nigerian Stock Exchange in due course. d) Expanded Branch Network As at December 2009 the Nigerian Stock Exchange has 13 branches across Nigeria other than its world-class trading floor in head office at Lagos. These are: Abuja, Kaduna, Port Harcourt, Kano, Onitsha, Ibadan, Yola, Benin, Uyo, Ilorin, Abeokuta, Owerri and Bauchi. The Exchanges 13 branches trading in real time, while plans are in the advanced stages for the opening of another branch in Oshogbo, Osun State. e) Inspection of Dealing Member Firms A total of 242 (out of 254) stock brokerage firms were inspected in the year 2009 by the Compliance Department of the Regulation and Risk Management directorate. Several firms reported trading losses and negative shareholders funds as a result of the financial crisis that followed the economic downturn. These firms have been advised to inject fresh funds and return their firms to profitability. The remaining twelve (12) firms had their inspections rescheduled. e) Complaints/Infractions and Violation of Rules of the Exchange A total of 249 unresolved complaints were brought forward from 2008, mainly from inactive dealing member firms. In 2009, a total of 417 complaints were received against dealing firms. Out of this, 287 complaints were resolved while 130 are still being investigated and pending resolution. Complaints received during the period under review were observed to border mainly on the unauthorized sales of shares and failure to remit sales proceeds. This was

attributed to the illiquidity suffered by the majority of dealing member firms, coupled with desperation of banks to recoup outstanding margin facilities. It was further observed that the majority of the dealing member firms do not comply with Article 102 of the Rules and Regulations Governing Dealing Members Know Your Client. This has often resulted in fraudulent sales of shares to persons who are not real owners of the shares. During the year, six (6) Dealing Member firms were suspended for failure to submit audited accounts, contrary to Article 15(h) of the Rules and Regulations governing dealing members. f) Investor Education Though the National Essay Competition for secondary schools and tertiary institutions was suspended during 2009, The Exchange sustained its investor education initiative, as students from all levels continued to visit The Exchange during their excursion programmes. The Annual meeting of Chief Executive Officers of listed Companies, stock and management of The Exchange was held in 2009.

2.6 Stock Market Development and Economic Growth Levine and Zervos (1998) showed a positive and significant correlation between stock market development and long run economic growth in their study of 47 countries. However, their study relies on a cross-sectional approach with well known empirical limitations. Nevertheless, a debate now exists within this framework. On one side, the view is that stock markets promote long-run growth. Greenwood and Smith (1996) argued that stock markets lower the cost of mobilizing savings facilitating investments into the most productive technologies and diversifying the risks. Obstfeld (1994) indicates that international risk sharing through internationally integrated stock markets improve resource allocation and accelerate growth. Bencivenga, Smith and Starr (1996) and Levine and Renelt (1992) suggested that stock market liquidity plays a major role in economic growth. Liquidity has also been argued to increase investor incentive to acquire information on firms and improve corporate governance, thereby facilitating growth (Holmstrom and Tirole, 1993). According to Pagano (1993) theoretical literature on stock market development and economic growth identifies three fundamental channels through which stock market and economic growth are linked. Stock market increases the proportion of savings that is funnelled to investment. Secondly, stock market may change the savings rate and hence affect investment. Finally stock market increases the efficiency of capital allocation. Capasso (2006) points out how stock market developments affect economic growth. In the beginning financial market are rudimentary and usually dominated by banks or other similar financial intermediaries. At this stage stock market does not exist at all or if they exist, their size does not allow them to have any significant effect on the economy. Accumulation of capital leads to the development of financial intermediaries and increases the number, complexity and sophistication of the financial instruments. As a result, the size of the financial market increases and stock market begin to grow in terms of market capitalization, traded value and number of listed companies. Stock market and financial intermediaries continue to develop together with the growth of the economy in general. In the economies with relatively small size stock market, further development goes mostly through the increase of share of the banking sector in the economy. In the economies where the size of the stock market is relatively large, further development of the financial system goes through the development of the equity market. Considerable amount of literature suggest that the development of stock markets is positively related with the level of economic development and accumulation of capital. This conclusion unequivocally supports the idea that as economies develop equity markets tend to expand

both in terms of the number of listed companies and in terms of market capitalization (Atje and Jovanovich, 1993; Korajczyk, 1996; Demirguc-Kurt and Maksimovic, 1996; Levine and Zervos, 1998 and Bose, 2005). However, these findings have not indicated a direct and monotonic expansion of the share of equity markets in the financial system. In fact, the development of equity markets always appears to be preceded and accompanied by the general expansion of the overall efficient financial system. Therefore, the co-evolution of real and financial variables is a complex and complicated phenomenon. In reality, the expansion of stock markets generally follows the development of other financial intermediaries, which, in many cases, continues as equity markets expansion (Korajczyk, 1996; Demirguc-Kurt and Maksimovic, 1996; Levine and Zervos, 1998 and Bose, 2005). Facts about the correlation between stock development and economic growth can be drawn from empirical literature (Levine and Renelt, 1992 and Brasoveanu, Dragota, Catarama, Semenescu, 2007). Furthermore, Atje and Jovanovich (1993) have concluded that there is strong positive correlation between the level of stock market development and economic growth. Levine and Zervos (1998) also emphasized on the fact that stock market liquidity measured as the value of stock traded relative to the size of the market and the size of the economy is significantly and positively related to the rate of economic growth. This significance in stock market development in the course of economic growth is also confirmed by Beck and Levine (2001); and they argued that the expansion of both banks and stock markets significantly affects growth. Some general facts about the development of equity markets have been drawn by DemirgucKurt and Maksimovic (1996) and Atje and Jovanovich (1993) who confirmed that stock markets lead to a relative increase of equity financing in the economy. In other words, given that the stock market development affect growth, the bank debt/equity ratio in the economy tends to increase at low levels of capital accumulation and to decrease only when stock markets have reached a reasonable size. Demirg-Kunt and Maksimovic, (1996) also argued that at initial stages of economic development, the expansion of stock markets increases both the opportunity for risk sharing and the flow of information in the market. These, in turn, allow firms easy and cheap access to bank loans and to increase the level of leverage. However, at the later stage as stock markets develop further, issuing equity becomes more convenient because of the declining costs and firms substitute equity for debt. Rajan and Zingales (1998) emphasized that the financial development is a prediction element for the economic growth, because the capital market reflects the present value of the future growth opportunities. The ex-ante development of the financial markets facilitates the ex-post economic growth of the external financing dependent sectors. Pagano (1993) concluded that because of trading externalities in the market and the deliberate behaviour of listing companies, the size of the stock market is critical in explaining its own development. Indeed, it will increase the risk sharing opportunities through risk portfolio diversification when firm raise capital from equity financing. The role of stock market in improving informational asymmetric has been questioned by Stiglitz (1985). He is argues that stock markets reveal information through rapid price changes creating a free rider problem that reduces investors incentives to initiate costly search. There are also some doubts in regards to contribution of liquidity itself to long-term growth. It is indicated that increased liquidity may prevent growth in three ways. Firstly, it may reduce saving rates through income and substitution effects. Secondly, by reducing uncertainty associated with investments, greater stock market liquidity may reduce saving rates because of the ambiguous effects of uncertainty on savings. Thirdly, stock market

liquidity encourages investors short sightedness, which negatively affecting corporate governance and thereby reducing growth. Studying the link between domestic stock market development and economic growth Claessens, Klingebiel and Schmukler (2006) using a panel data technique concluded that domestic stock market development as well as stock market internationalization are positively affecting the log of GDP. Minier (2003) analyzed the relationship of the stock market dimension and economic development by regression tree techniques; he found evidence that the positive influence of stock market development on economic growth held only for developed stock markets in terms of turnover, in the case of underdeveloped stock markets the influence is negative. Studies on the relation between stock market development and economic growth in different countries were performed. Nieuwerburgh, Buelens and Cuyvers (2006) analyzed the long-run relationship between stock market development (measured by market capitalization and number of listed shares) and economic growth (measured as a logarithmic difference of GDP per capita). They found out that that stock market development determined economic growth with variations in time dues to institutional changes affecting the stock exchange. Hondroyiannis, Lolos and Papapetrou (2005) found out that the relationship between economic growth and stock market development is bi-directional. Studying the effect of different components of financial systems on economic growth Liu and Sinclair (2008) emphasized the positive effect of stock market development (measured by market capitalization as percentage of GDP, turnover as percentage in GDP and stock return) on economic growth. Bolbol, Fatheldin, and Omran (2005) analyzed the effect of financial markets (measured by the ratio of market capitalization on GDP and the turnover ratio) on total factor productivity and growth (the per capita GDP growth rate) they demonstrated that stock market development had a positive influence on factor productivity and growth. Ben Naceur and Ghazouani (2007), studying the influence of stock markets and banking system development on economic growth, concluded that financial development could negatively influence the economic growth in countries with underdeveloped financial systems; they stressed the role of building a sound financial system.

2.7 Stock Market Development Indicators Demirgc-Kunt and Levine (1993) indicated traits of characteristics of stock market development as (a) Traditional characteristics, which include market capitalization, the amount of new capital raised through stock offerings, the number of listed companies and turnover; (b) Institutional characteristics, which include regulations, information disclosure, transparency rules and trading costs; and (c) Asset pricing characteristics, which measures the efficiency of the market especially in relation to the informational content inherent in price and pricing of risk. A theoretical explanation of stock market development influencing the choice of finance by firms can be found in the arguments of Booth, Aivazian, Demiguc-Kunt and Maksimovic (2001) that as equity markets size increase and become more developed they would become a viable option for corporate financing. This would not be the case in developing countries, because the banking sector is the main source of debt and is far developed than the stock markets in these countries. Organized stock exchanges would influence the process, also, because they provide liquidity for financial assets, and make risk diversification possible (Shahbaz, Ahmed and Ali, 2008).

Another evidence is provided by Subrahmanyam and Titman (1999) who observed that the smaller the number of firms on the stock market the less accurate the information conveyed by stock market to the public which discourages private firms from going public but as the stock market improves, the information conveyed improves, and private firms are encouraged to go public. This shows that the size of the stock market determines the accuracy of the information conveyed by the market to the public. It has been observed by Agarwal and Mohtadi (2004) that size of the stock market determines how firms would prefer equity financing to debt financing. The indicators of the stock market development or performance are market capitalization, volume of shares, number of listed companies and the value of shares traded (Agarwal and Mohtadi, 2004). Value of shares traded is important as Booth, Aivazian, Demiguc-Kunt and Maksimovic (2001), noted because if a large amount of equity is not traded it can be inhibiting to corporate financing. According to Tanko (2004) market capitalization is perhaps the indicator most widely applied in assessing the size of a stock market to an economy and in relation to other markets. It is a product of the outstanding shares and market price of equities on a stock exchange. Thus, in a bear market when prices are generally declining, and if there are no reasonable increases in listings to compensate for the decline in prices, market capitalization would drop. On the other hand, in a bull market when prices are on the upward swing, with or without corresponding increases in outstanding shares, market capitalization would rise. Bakare (2000) defined market capitalization as the discount rate used to determine the present value of future earnings. It is one of the major determinants of the market size of any stock exchange. The size of the market capitalization and its growth rate pose a major influence on the growth and development of the economy. The determination of this rate is based on the forces of demand and supply of securities. SEC (2007) reported that stock market capitalization is perhaps the most important criterion in assessing the size of a capital market. It is a function of market price and size of paid-up capital of listed companies. For individual companies, the market capitalization is the product of market price and number of outstanding. In other words market capitalization of a company refers to the monetary value of all its shares. It gives you an idea of the size of the company. The sum total of market capitalization for all listed equities on an Exchange gives the aggregate equity market capitalization of a stock market. Similarly, the market capitalization of the market gives one an idea of the size of the market that is the total value of all the billions of shares registered on the stock exchange. Thus, market capitalization does fluctuate with movements in the market price of company equity and changes in outstanding shares. For instance, an increase in the outstanding shares of company with market price either held constant or increased would enhance the market capitalization of a company. Generally, the aggregate market capitalization of a stock market would show an upward trend in a bullish market while the converse would happen in a bearish market situation. To a portfolio investor, the size of market capitalization of a stock market is an important motivating factor for investing in a particular Company or market. To most institutional investors better company is expected to have a sizeable market capitalization for them to consider investing in that company. To assess how big a stock market is within the national economy, the market capitalization is usually compared with the Gross Domestic Product (GDP) or with other country for comparison. Also, according to Booth, Aivazian, DemigucKunt and Maksimovic (2001), volume and value of transactions is equally as important as market capitalization. The value shares traded also indicates liquidity on the stock market (DemigucKunt and Maksimovic 1996), at the same time this variable measure the transaction cost of the market. Demirguc-Kurt and Levine (1995) argued that there are three indicators of stock market development. The first measure the ratio of market capitalization to GDP

(Capitalization ratio), provides an indication of overall market size. Market size is an indicator of market development. Countries with market capitalizations which are small relative to their GDPs are likely to have few opportunities for raising capital via the stock market and also less ability to diversify risk. The second measure of stock market development is the ratio of total value traded to GDP (Value Traded ratio). This measure provides an indication of the liquidity of the market relative to the size of the economy. A high Value Traded/GDP ratio indicates that market trading is a significant fraction of the economy and should be associated with higher levels of market development. The third measure of stock market development is the ratio of total value traded relative to market capitalization (Turnover ratio). This ratio measures the liquidity of the market, the higher the ratio, the more liquid the market. Higher levels of liquidity are generally associated with higher levels of market development. It is important to note that these measures need not all moves together. For example, a market may be small but have a high value of turnover ratio, indicating that liquidity is high in the market. In contrast, a large market in which stocks are traded infrequently will have a low turnover ratio. The performance or development stock markets can be estimated through three stock market indicators, market capitalization relative to GDP, value of shares traded relative to GDP, and the value of shares traded relative to market capitalization (Levine and Zervos, 1998).

2.7.1 Size According to Levine and Zervos (1998) the market capitalization ratio measures the size of the stock market and equals the market capitalization divided by GDP. La Porta, Lopez-deSilanes, Shleifer and Vishny (1998) and Levine and Zervos (1998) used capitalization to GDP ratio (capitalization ratio) in their work as an indicator of market development. Although large markets do not necessarily function effectively and taxes may distort incentives to list on the exchange, many observers use the market capitalization ratio as an indicator of market development. According to Muhtadi and Agarwal (1997) market capitalization measures the value of listed shares which determine the size of the market. The assumption behind market capitalization ratio is that overall market size is positively correlated with the ability to mobilize capital and diversify risk on an economy-wide basis. According to NSE (2008) about 301 securities were listed in the market and the market capitalization was approximately N 9.56 trillion, but Nigerian stock market is still regarded as small. In Africa, Nigeria ranked 4th after South Africa, Egypt and Morocco in term of market size (Standard and Poors Emerging Stock Markets Factbook, 2000 as cited in Osinubi, 2004). Alile and Anao (1986) cited in Osinubi, (2004) adduced possible reasons for the small size. One of the reasons is that indigenous entrepreneurs were not too keen into going public due to fear of losing control. However, an innovative move by the stock market through the creation of secondtier securities market (SSM) tried to find solution to the problem. Measures taken by the governments and the exchange itself are expected to boost the resource base of the stock market in Nigeria. These measures are: Privatization of Public Enterprises, linking up of the exchange with Reuters Electronic Contributors System for on line global dissemination of stock information, launching of the exchanges Intranets System (CAPNET) and the transition of the exchange from manual call-over Trading System to Automated System (ATS) in April 1999. It is also expected that the present democratic dispensation would impact positively on the turnover of the exchange (Osinubi, 2004).

2.7.2 Liquidity Indicators

Liquidity generally refers to the ability to buy and sell securities easily. Liquid equity markets allow companies on the one hand to have a permanent access to capital through equity issues and on the other hand, to allow investors to switch out of equity if they need to access funds or if they want to change the composition of their portfolios (Demirg-Kunt and Levine, 1996). According to Levine and Zervos (1998) there are two related measures of market liquidity. First, the turnover ratio equals the total value of domestic shares traded divided by market capitalization. The turnover ratio measures the trading of domestic equities on domestic exchanges relative to the size of the market. High turnover is often used as an indicator of low transactions costs. Importantly, a large stock market is not necessarily a liquid market: a large but inactive market will have a large market capitalization ratio but a small turnover ratio. The second measure of market liquidity is the value traded ratio, which equals the total value of domestic shares traded on the stock market exchange divided by GDP. While value traded ratio is not a direct measure of trading costs or the uncertainty associated with trading on a particular exchange, but theoretical models of stock market liquidity and economic growth directly motivate the use of value traded ratio (Levine 1991). Furthermore, the value traded ratio measures the organized trading of firm equity as a share of national output and should therefore positively reflect liquidity on an economy-wide basis. The value traded ratio may be importantly different from the turnover. While the value traded ratio captures trading relative to the size of the economy, turnover measures trading relative to the size of the stock market. Thus, a small, liquid market will have a high turnover ratio but a small value traded ratio. According to Muhtadi and Agarwal (1997) total value of shares traded on the stock market also indicates the size of the market in relation to its liquidity. They also argue that the total value traded ratio complements the market capitalization ratio, although a market may be large, there may be little trading. According to Osinubi (2004) this ratio should positively reflect liquidity on an economy wide basis. Total Turnover ratio equals the value of total shares traded divided by market capitalization. Though it is not a direct measure of theoretical definitions of liquidity, high turnover ratio indicates low transaction costs in the market. Turnover also complements the total value traded ratio. The turnover ratio of a stock market is usually indicative of its level of activity that is the rate at which securities are bought and sold, as well as its liquidity, which is the ease at which securities can be converted into cash (Tanko, 2004). He argued that important attribute of a stock market is its ability to absorb large volumes of transactions without significant changes in prices. The Nigerian stock market value traded ratio and turnover ratio further affirm the relative illiquidity of the market, but improving over the years, (Tanko, 2004 and Osinubi, 2004). 2.7.3 Market Concentration Market concentration can be measured by looking at the share of market capitalization accounted for by the large stocks. The significance of market concentration as a measure of performance of stock market is because of the adverse effect it may have on the liquidity of the market. In many economies such as Nigeria, a few companies dominate the market as the market capitalization of the top ten equities listed on the Nigerian Stock Exchange accounted for about 40 percent of the total stock market capitalization (Osinubi, 2004). In 2009, 20 most capitalized companies, as at the year end, accounted for 69.5% of the equity market capitalization and 49.4% of the total market capitalization of the Exchange. Consequently, changes in the prices of these stocks impacted substantially on the total market capitalization and the All-Share Index (NSE 2009).

2.8 Theoretical Framework The existence of link between stock market development and economic growth has long been debated by researchers. In some years back economic theory held that the financial structure of any economy did not affect real economic variable, including economic growth. Theoretically, the traditional growth theory could not explore the relationship between stock market development and economic growth (Demirguc-Kunt and Levine 1993). A number of theories have been developed to explain the models of why people and organization invests in capital market and the expectation of market participants. These theories are linked with the aim of explaining stock market development and economic growth. One of these theories is market segmentation theory which assumed that short term and long term return are determined in separate or segmented markets. Some investors prefer short term securities; they invest in short term bonds. Again, there are some investors who prefer long term securities. As a result bonds having different maturity periods are not perfect substitutes for one another. Such an argument implies that lenders and borrowers are interested in bonds of only one maturity and even if the return on a sequence of shorter bonds were considerably higher than the return on those bonds, they would not attempt to switch into shorter bonds. Therefore, expectation concerning short rates would have no role in determining long rates. Thus even if short term rate increases in any period of time this theory implies that investors will not shift from long term bonds to short term bonds in order to enjoy higher rate in the short run. Thus even if the short run rate of interest increases it will not influence the long term rate of interest. This theory is based on institutional practices followed by the commercial banks and insurance companies and investment trusts. While the commercial banks mostly deal in short term securities, insurance companies and investment trusts mostly deal in long term securities. This theory is however not free from defect as it overlooks the fact that there is considerable degree of overlapping between different markets. Same institutions operate in different markets dealing in securities of different maturities. As per the Liquidity Preference Theory the rates of interest over a long term also admit a premium that the investors are entitled to receive, if they possess debt instruments that have longer term periods. They are not only concerned with what the investors may assume. According to the Liquidity Preference Theory this premium is known as the liquidity premium and the term premium. The term premium or the liquidity premium is supposed to even out the financial risks the investors may have suffered from as a result of investment in debt instruments that had longer term periods. The great price uncertainty is one of the many risks the investors may face if they put their money in long-term debt instruments. As a result of the term premium the yield of the debt instrument that has a longer term period is higher compared to debt instruments having shorter term periods. The main area of concern for the Liquidity Preference Theory is not liquidity. It deals more with the risks that are associated with maturity. According to the Liquidity Preference Theory the risks related to maturity are directly proportional to the length of the maturity period. This means that the debt instruments that have longer maturity periods have more risks. As per the exponents of the Liquidity Preference Theory the investors do not want to take risks in their investments. They normally want to be provided with a premium for putting their money in debt instruments with longer maturity periods. Preferred habitat theory rejects the assertion that risk premium must increase uniformly with maturity. This theory is explained in terms of time-bucket preferences of investors. The investors who participate in bond market have different preferences in terms of maturities depending upon their liability profile. For example, Insurance companies and pension funds have long term liabilities and they prefer to invest in bonds with relatively higher maturities.

Banks and mutual funds have short term liabilities, so they go for short-term bonds. These distinct investment horizons create different levels of demand and supply in different time buckets. Higher the demand for bonds in a particular time bucket, higher the price and lower the yield. Demirguc-Kunt, and Levine (2008) and Levine (2004) theory on the relationship between stock market earnings and economic growth states that financial instruments, markets, and institutions may arise to mitigate the effects of information and transaction costs. In emerging to ameliorate market frictions, financial arrangements change the incentives and constraints facing economic agents. Thus, financial systems may influence saving rates, investment decisions, technological innovation, and hence long-run growth rates. The reductions in financial market frictions that increase expected rates of return and improve risk diversification opportunities could increase or decrease growth rates depending on the general equilibrium effects on aggregate saving rates. The theory that is used in explaining this work is the Demirguc-Kunt, and Levine (2008) and Levine (2004) theory on the relationship between stock market earnings and economic growth, so that the study can provide evidence as to whether theories relevant to role of stock market in economic growth and the findings from developed and developing countries can be applied to Nigerian economy.

CHAPTER THREE RESEARCH METHODOLOGY 3.1 Introduction This chapter describes the procedure employed for the conduct of this research. It contains the research design, population, sampling technique and sample size, data to be used, sources of the data, and methods of data analysis.

3.2 Research Design The study adopted survey design through content analysis; the study therefore employed both descriptive and inferential statistics in analysing the data. Multiple regression is used to analyse the relationship between the dependent and independent variables. Capitalization ratio (CAPR) Turnover ratio (TOVR) and value traded ratio (TVTR) are the independent variables, while the GDP serves as the dependent variable from 1989 to 2008.

3.3 Population of the Study Nigerian stock exchange is the area of study for this research work, with preference to market capitalization and total value traded and GDP. The population of the study is the entire transactions on the floor of the Nigerian Stock Exchange from 1989 to 2008 which is the period of the study.

3.4 Sampling Technique and Sample Size The sample size of the study was selected using judgmental/convenience sampling. A sample of stock market capitalization, total traded value at the end of the year is selected from 1989 to 2008. The choice of these years is based on the fact that pre and post democratic era can be analysed, since many economic reforms took place within the first ten years of democratic rule. The year 1989 to 1998 constitute the pre democratic era, while 1999 to 2008 constitute the post democratic era. The period witnessed significant increase in awareness of what stock market is, major economic policy changes in Nigerias corporate history, more regulation and reforms, more firms quoted and more firms issued initial public offering.

3.5 Sources of Data Data used in this study are mainly from secondary sources. They include Central Bank of Nigeria (CBN) annual reports and statement of account, CBN bulletins, Security and Exchange Commission data bank and the Nigerian Stock Exchange fact books, annual reports on market performance; and the Nigerian Stock Exchange yearly official lists for the market capitalization and total turnover value for each of the years covered in the study. The Nigerian Stock Exchange fact book is a reliable source of data of the market activities. Also Nigerian Stock Exchange annual, biannual and quarterly company reports are also reliable because they are statutorily required to be audited by recognized auditing firms before publication.

3.6 Method of Data Analysis The study employed both descriptive and inferential statistics; the former is used to represent and summarize the data and results for easy understanding and interpretation. The Multiple Least Squares method is the one of the most popularly used statistical methods for multiple regression analysis which quantitatively characterizes the relationship between a response variable and one or more explanatory variables. The method describes a collection of statistical techniques which serve as the basis for drawing inference as to whether or not a relationship exists between two or more quantities within a system, or within a population. More specifically, Multiple Least Square method is adopted in this analysis to quantitatively analyse the relationship between a response variable or the dependent GDP, and independent

or explanatory variables, CAPR, TOVR and TVTR. The strength of a relationship will be measured by a correlation coefficient. The model is based on Demirguc-Kunt and Levine (2008) theory on the relationship between stock market development and economic growth. It is modified to measure the impact of stock market development on GDP. The linear regression equation for this model is:

GDPi = 0 + 1 CAPRi + 2 TOVRi + 3TVTRi + i

Where; GDPi represents Gross Domestic Product, CAPRi represents the market capitalisation ratio and TOVRi represent the turnover ratio, TVTRi represents value traded ratio while i represents the error term or a disturbance term; 1 and 1,2,3 are the regression constant and regression coefficients. Statistical software for Social Sciences (Eview) is used to estimate the linear regression model. From the software the values of the regression constant () coefficient of regression () and the error term () are obtained. The result after running the package gives the values of t-statistic, F-values and their respective p-values which will result in either accepting or rejecting the null hypotheses. The variables are converted to logarithms form, so that there will be a uniform unit of measurement between the variables. The study uses Unit root test and Cointegration test, since the variables to be used in this study are time series in nature and so it is necessary to analyze whether the series are stationary or not and determine whether the series are co integrated or not.

CHAPTER FOUR DATA PRESENTATIONS, ANALYSES AND INTERPRETATIONS 4.1 Introduction This chapter presents the analyses and interpretation of the data used in this study to enable us test the hypotheses and for inference to be drawn. The chapter discusses the growth pattern of Nigerian stock market development indicators, stationarity test, cointegration test, regression result analysis and discussion of the outcomes of the tests.

4.2 Growth Pattern of Nigerian Stock Market Development Indicators The market capitalization ratio (CAPR) measures the size of the stock market and equals the value of listed domestic shares (market capitalization) divided by GDP. The turnover ratio (TOVR) equals the total value of domestic shares traded divided by market capitalization. The turnover ratio is a liquidity indicator that measures the liquidity of the market relative to the size of the market. High turnover is often used as an indicator of low transactions costs. The value traded ratio (TVTR), which equals the total value of domestic shares traded on the stock market exchange divided by GDP. The value traded ratio is a measure of liquidity of the market relative to the size of the economy. Table 4.1 below shows that all the indicators recorded positive increase from 1989 until 1998 when the market capitalization ratio recorded a slight decrease. All the indicators recorded significant improvement within the period of 1999 to 2008 compared to 1989 to 1998, with some slight downshift movement by turnover ratio in 2002 and 2005. Table 4.1 shows that in 2008 the market registered a market capitalization value of N 9516.2 billion from N12.8 billion in 1989, which shows a remarkable performance of the market. In 1989 total traded value N0.6103 billion, at the end of December 2008 total traded value was 1679.14. Despite these improvement the percentages of the market capitalization shows that the market is still small in size. It also indicates the relative illiquidity of the market. Table 4.1: Development/Performance Indicators of the Nigerian Stock Market (Market Capitalization Ratio, Turnover Ratio and Value Traded Ratio (1989-2008) YEAR GDP N Billion A 216.7975 267.5500 312.1397 532.6138 683.8698 899.8632 1933.212 2702.719 2801.973 2708.431 3194.015 MCAP N Billion B 12.8 16.3 23.1 31.2 47.5 66.3 180.4 285.8 281.9 262.6 300.0 TTVT N Billion C 0.6103 0.2254 0.2421 0.4917 0.8044 0.9859 1.8388 6.9796 10.3305 13.5711 14.072 CAPR% D=B/A 5.904 6.092 7.401 5.858 6.946 7.368 9.332 10.575 10.061 9.696 9.393 TOVR% E=C/B 4.768 1.383 1.048 1.576 1.693 1.487 1.019 2.442 3.665 5.168 4.691 TVTR% F=C/A 0.282 0.084 0.078 0.092 0.118 0.110 0.095 0.258 0.369 0.501 0.441

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

2000 2001 2002 2003 2004 2005 2006 2007 2008

4582.127 4725.086 6912.381 8487.032 11411.07 14572.24 18564.59 20657.32 23842.17

472.3 662.5 764.9 1359.3 2112.5 2900.1 5121.0 13294.6 9516.2

28.1531 57.6838 59.4067 120.403 225.82 262.936 470.253 1076.02 1679.14

10.307 14.021 11.066 16.016 18.513 19.902 27.585 64.358 39.913

5.961 8.707 7.767 8.858 10.690 9.066 9.183 8.094 17.645

0.614 1.221 0.859 1.419 1.979 1.804 2.533 5.209 7.043

Source: Nigerian Stock Exchange Annual Reports, Central Bank of Nigeria Statistical Bulletins.

Also Table 4.1 shows the pooled summary statistics of selected Nigerian stock market development indicators from 1989 to 2008. The average market size (capitalization ratio) over time for the period of this study is 15.52 percent and gives an indication of the minute size and low level of integration of the Nigerian stock market in Nigerian economy. In the case of turnover ratio the average value of 5.74 percent is indicative of the overall low liquidity levels in the Nigerian stock market. The value traded ratio, another measure of stock market liquidity and transaction cost, has an average value of 1.26 percent, which indicates illiquidity of the Nigerian stock market in relation to the Nigerian economy. As measure of transaction cost it indicates high transaction cost in the market. Figure 4.1: The pattern of growth of stock market development indicators from 1989-2008

70 60 50 40 30 20 10 0 90 92 94 CAPR
Source: Compiled from Eview 4.0

96

98

00 TOVR

02

04 TVTR

06

08

The pattern of growth of stock market development indicators shown in Fig. 4.1 have been varying over the period of this study. Sometimes they increase and at other times they decrease but they all move in the same manner. The Nigerian Stock Market indicators recorded downward movements particularly the capitalization ratio. This is because a significant portion of the funds that left the stock market for the Private Placement Market in 2007 remained locked in, as many of the issuers have not yet applied to The Nigerian Stock Exchange for listing. Capitalization ratio, Turnover ratio and Traded Value ratio recorded a down ward movement in 2002 and 2005. The indicators recorded improvement during democratic era (1999 - 2008) compared with the pre democratic era (1989 - 1998). 4.3 Stationarity Tests Just like in other time series data, the variables stock market capitalization (MCAP), stock market traded value (TTVT), Growth Domestic Product (GDP), stock market capitalization ratio (CAPR) stock market total turnover ratio (TVTR) and, stock market value traded ratio (TVTR) must be tested for stationarity before running the relationship test. For this purpose, the current study uses some of the most recent unit root tests, namely the Phillips-Perron. The results of the stationarity tests at level (not presented here) show that most of the variables are not stationary at level. Having found that the variables are not stationary at level, the next step is to difference the variables once in order to perform stationarity tests on differenced variables. The results of the stationarity tests on differenced variables are presented in the Table 4.2. Table 4.2: Results of Phillip-Perrons Unit Root Test for Stationarity Variables GDP MCAP TTVT CAPR TVTR TOVR PP Test Statistic -3.665208 -3.503529 -3.770108 -4.060648 -3.866319 -3.514315 Critical Value at 5% -3.3350 -3.3350 -3.3350 -3.3350 -3.3350 -3.3350 Lag 2 2 2 2 2 5 Order of Integration I(1) I(1) I(1) I(1) I(1) I(1) Remarks Stationary Stationary Stationary Stationary Stationary Stationary

Source: Compiled from Eview 4.0

The results reported in Table 4.2 shows that after differencing the variables once, all the variables were confirmed to be stationary. The Phillips-Perron tests applied to the first difference of the data series reject the null hypothesis of non-stationarity for all the variables used in this study. Since all the variables are stationary at 5% critical value which lower than the PP test values. It is, therefore, worth concluding that all the variables are integrated of order one. 4.4 Cointegration Test The cointegration approach has widely been used to establish longrun relationship among certain variables. The method of cointegration requires that variables must be integrated of the same order. If the order of integration among variables is not the same, then longrun relationship among them cannot be established. Johansen cointegration test is used in this study to estimate the long run relationship between the variables. Table 4.3: Results of Cointegration Test Variables Trace Statistic Critical value at 5% Max-Eigen statistic Critical Value at 5%

GDP CAPR 21.86859 12.53 19.15881 GDP TOVR 13.59004 12.53 12.86661 GDP TVTR 15.69304 12.53 15.69091 Trace test indicates 1 cointegrating equation(s) at the 5% level Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level
Source: Compiled from Eview 4.0

11.44 11.44 11.44

The results reported in Table 4.3 shows that there is cointegration relationship between stock market development variables used in this study and the GDP at 5% Critical value in both Trace test and Max-eigenvalue test. Size of the stock market, liquidity of the market in relation to the market and liquidity of the market in relation to the GDP which is represented by CAPR, TOVR and TVTR respectively, have a long run relationship with the GDP since the variables are integrated of the same order I(1). 4.5 Regression Result

GDPi = 4.661980+ 4.089154CAPRi + 0.320616TOVRi - 0.108281TVTRi

The equation indicates that an increase in Nigerian stock market size by N1million will positively increase GDP by N4.089154 million. An increase in stock market activity via higher liquidity particularly turnover ratio by N1million augments GDP growth by only N0.320616 million. This shows that there is positive relationship between the market liquidity (turnover ratio) and the GDP. In the case of other liquidity indicator value traded ratio indicates negative relationship with the GDP. Table 4.4: Multiple Least Squares Regressions Result Dependent Variable: GDP Method: Least Squares Date: 07/22/10 Time: 11:24 Sample: 1989 2008 Included observations: 20 Variable Coefficient Std. Error t-Statistic C 4.661980 0.389531 1.196820 CAPR 4.089154 0.674541 6.062128 TOVR 0.320616 0.391020 0.819949 TVTR -0.108281 0.716467 -0.151132 R-squared 0.977807 Mean dependent var Adjusted R-squared 0.973646 S.D. dependent var S.E. of regression 0.105399 Akaike info criterion Sum squared resid 0.177743 Schwarz criterion Log likelihood 18.85272 F-statistic Durbin-Watson stat 2.045859 Prob(F-statistic)
Source: Compiled from Eview 4.0

Prob. 0.2488 0.000016 0.4243 0.8818 3.458089 0.649253 -1.485272 -1.286125 234.9857 0.000001

The overall fitness of the regression measured by R-squared indicates moderate fit since the value of the 0.977807 R-squared is close to 1. Adjusted R-squared 0.973646indicates that the model used is good enough since the independent variables account for 97.4% variance in the dependent variable. Durbin-Watson statistic value 2.045859 reported above is indicative that there is no presence of serial correlation in the residuals of the estimated equation since the value is closer to 2. In other words since the Durbin-Watson statistic value is higher than Rsquared, which indicates that the result cannot be spurious. The standard deviation of the dependent variables 0.649253 is larger than the standard error of the regression 0.105399 which indicates that the regression has explained most of the variance which is exactly the same result with the R-squared.

As shown in table 4.4 the corresponding p-value of each independent variable t-Statistic indicates contribution of each independent variable when all other independent variables are zero. The corresponding p-value 0.000016 of the CAPR which represent market capitalisation ratio (size) indicates that CAPR contributes significantly to the regression. Thus the first hypothesis is rejected since there is significant relationship between the Nigerian stock market capitalization ratio and the GDP. The second corresponding p-value of the TOVR which represent total turnover ratio (liquidity) is 0.4243 which indicates that the variable does not significantly contribute to the regression. This led us to accept the second hypothesis, that there is no significant relationship between the Nigerian stock market turnover ratio and the GDP. The last variable traded value ratio (liquidity) also does not significantly contribute to the regression the corresponding p-value of TVTR is 0.8818. This led us to accept the hypothesis since there is no significant relationship between the Nigerian stock market values traded ratio and the GDP. Prob(F-statistic) displays the p-value corresponding to the reported F-statistic which indicates overall significant relationship between the dependent variable (GDP) and the set of all independent variables (CAPR, TOVR, TVTR) used in the study at the value of 0.000001.

CHAPTER FIVE SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Summary of the Major Findings Nigerian stock market is relatively small market because the average market size (capitalization ratio) over time for the period of this study (1989-2008) is only 14.79 percent. Also the average capitalization ratio 14.79 percent gives an indication of weak level of integration of the Nigerian stock market in Nigerian economy. The average value of turnover ratio is only 5.86 percent which indicate the overall low liquidity levels in the Nigerian stock market. The average value of the value traded ratio is only 1.26 percent which indicates illiquidity of the Nigerian stock market in relation to the Nigerian economy and indicates very high transaction cost in the market. This is consistent with findings of Tanko (2004) and Osinubi (2004) who noted the relative illiquidity of the market. Despite the varying movement of the indicators over the period of this study, they still move in the same manner as shown in the findings they increases and decreases at the same time. All data are found to be stationary using Philip Perron test and Johansen test was used to test cointegration relationship between all the variables used in this study, which indicates long run relationship between the variables can be sustained. The study found overall significant relationship between the Nigerian stock market development indicators and the GDP. This is consistent with the work of Demirguc-Kurt and Levine (1996), Singh (1997) and Levine and Zervos (1998) King and Levine (1993), Sarkar, (2005) and Demirguc-Kurt and Maksimovic (1996), Chakraborty, (2008), Claessens, Klingebiel, and Schmukler (2006) and Brasoveanu, Dragota, Catarama, Semenescu (2007), who found there is relationship between various indicators of stock market development and GDP in their respective countries. This findings contradict the findings of Stiglitz (1985), La Porta, Lopez-de-Silanes, Shleifer and Vishny (1998), Bencivenga, Smith and Starr (1996) and Bhide (1993), who opined that stock markets has no significant relationship with GDP. The study found out that the size of the Nigerian stock market has significant relationship with the GDP, if all other variable remained constant or zero. Also, the study found out that turnover ratio which measure liquidity of the stock market in relation to the stock market has insignificant relationship with the GDP if other variables remain constant. The study found that the value traded ratio which measure the liquidity of the stock market in relation to economy has insignificant relationship with the GDP if other variables remain constant, these findings are consistent with the findings of Stiglitz (1985).

5.2 Conclusion This study explored the development of the Nigerian stock market, particularly the determinants of stock market development, capitalization ratio which measure size, turnover ratio and value traded ratio measure liquidity. This finding is consistent with the conclusion of other studies as discussed earlier. The study found all the variables are stationary integrated of order one and cointegrated with long run relationship. The study concludes that Nigerian stock market is small, illiquid and has low level of integration. Because of the size and low level of integration of the Nigerian stock markets, trading occurs in only a few stocks which account for a considerable part of the total market

capitalization. In addition, the market suffers from the problem of low liquidity. Low liquidity means that it will be harder for an investor to convert his stocks to cash easily. The major indicators of the stock market development employed in this study are market capitalization ratio, turnover ratio, and traded ratio. These served as explanatory variables while the GDP serve as dependent variable. The findings corroborate with most existing literature reviewed in the study. There is overall significant relationship between stock market development indicators (capitalization ratio, turnover ratio, and traded ratio) used in the study have with the GDP. These results showed the important role played by stock market in the economy of Nigeria. Market capitalization ratio which represents size of the market has significant contribution to regression, in other words it significance relationship with GDP than the turnover ratio and the traded ratio which represent different measures of liquidity.

5.3 Recommendations The implications of these results for possible policy making are as follows: a) It is clear that the size, liquidity and level of integration of the Nigerian stock market into the economy are still weak. b) Despite the minute size of the Nigerian stock market, it size still helped to move the Nigerian economy in a positive direction. c) Because of the illiquidity problem of the market, the market has insignificant relationship with the Nigerian economy. d) Nigerian stock market will contribute significantly if size and liquidity are developed simultaneously. Based on these policy implications, the following recommendations are made. i) Nigerian financial regulators need to ensure that the stock market is developed in order to get incorporated into the economic system, by making new laws and regulations intended to protect creditors and investors, including improvements in the general legal framework, infrastructure, property rights, minority shareholders rights, and insider trading and information regulations. Even though, many efforts have been made recently towards improving the financial systems of this country to stimulate economic growth, they have mainly focused on banking systems reforms, deregulation, managing bank insolvency, now they need to focus on stock markets. ii) Although there have been some developments in the Nigerian stock market in the recent past, yet, there is a strong need for the implementation of effective regulations that can contribute to transparency, effectiveness of the Nigerian stock market activities and make the environment more enabling for investment. These will attract more international investors and also restore investors confidence because the downward movement recorded by the indicators which indicate economic crisis at early stage. iii) To improve the trading activities on Nigerian stock market, there is need to enhance awareness via education and promotions of the need to raise capital through stock markets. This because many Nigerians are not aware of the opportunities in the Nigerian stock market, most of the investors buy stocks and keep for years. There is also need to encourage indigenous companies to raise capital through the market; instead of bank loans. Furthermore there is need for liberalization of the market, where by governments and firms can actively raise capital in international stock markets and foreigners are allowed to invest in the Nigerian stock market. iv) To improve liquidity, the cost of transaction in the Nigerian stock market and the determination of stock prices should be reviewed, to make raising capital cheaper. The cost of buying and selling stock need to be reduced and market forces should be allowed to determine the stock prices, without any restriction. Also, there is need for more new products

in the market, so that investors will have alternative ways of diversification of risk and returns. v) Finally, in the pursuit of these market development policies, there must be consolidation and indeed an improvement on current growth and investment patterns in Nigeria to infuse higher demand for stock market activities, so that domestic and international investors can invest in the market safely.

5.4 Suggestion for Further Studies Furthermore, the evidence also shows that there is a shortfall in stock market activity in Nigeria. In other words, Nigeria has low stock market development than countries with similar fundamentals and policies. Although there are different possible explanations as to why Nigerian Stock Market has performed in this way, future work is necessary to shed more light on this issue.

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Appendices
Appendix I Development/Performance Indicators of the Nigerian Stock Market
YEAR GDP N Billion A 216.7975 267.5500 312.1397 532.6138 683.8698 899.8632 1933.212 2702.719 2801.973 2708.431 3194.015 4582.127 4725.086 6912.381 8487.032 11411.07 14572.24 18564.59 20657.32 23842.17 MCAP N Billion B 12.8 16.3 23.1 31.2 47.5 66.3 180.4 285.8 281.9 262.6 300.0 472.3 662.5 764.9 1359.3 2112.5 2900.1 5121.0 13294.6 9516.2 TTVT N Billion C 0.6103 0.2254 0.2421 0.4917 0.8044 0.9859 1.8388 6.9796 10.3305 13.5711 14.072 28.1531 57.6838 59.4067 120.403 225.82 262.936 470.253 1076.02 1679.14 CAPR% D=B/A 5.904 6.092 7.401 5.858 6.946 7.368 9.332 10.575 10.061 9.696 9.393 10.307 14.021 11.066 16.016 18.513 19.902 27.585 64.358 39.913 TOVR% E=C/B 4.768 1.383 1.048 1.576 1.693 1.487 1.019 2.442 3.665 5.168 4.691 5.961 8.707 7.767 8.858 10.690 9.066 9.183 8.094 17.645 TVTR% F=C/A 0.282 0.084 0.078 0.092 0.118 0.110 0.095 0.258 0.369 0.501 0.441 0.614 1.221 0.859 1.419 1.979 1.804 2.533 5.209 7.043

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Sources: Nigerian Stock Exchange Annual Reports, Central Bank of Nigeria Statistical Bulletins.

Appendix II
a. Growth Domestic Product Phillips-Perron Test Statistic -3.665208 1% Critical Value* 5% Critical Value 10% Critical Value *MacKinnon critical values for rejection of hypothesis of a unit root. Lag truncation for Bartlett kernel: 2 Residual variance with no correction Residual variance with correction
Source: Eview 4.0 results

-4.6405 -3.3350 -2.8169

( Newey-West suggests: 2 ) 0.002262 0.002954

b. Market Capitalization Phillips-Perron Test Statistic

1% Critical Value* 5% Critical Value 10% Critical Value *MacKinnon critical values for rejection of hypothesis of a unit root. Lag truncation for Bartlett kernel: 2 Residual variance with no correction Residual variance with correction
Source: Eview 4.0 results

-3.503529

-4.6405 -3.3350 -2.8169

( Newey-West suggests: 2 ) 0.016249 0.010038

c. Total Traded Value Phillips-Perron Test Statistic

1% Critical Value* 5% Critical Value 10% Critical Value *MacKinnon critical values for rejection of hypothesis of a unit root. Lag truncation for Bartlett kernel: 2 Residual variance with no correction Residual variance with correction
Source: Eview 4.0 results

-3.770108

-4.6405 -3.3350 -2.8169

( Newey-West suggests: 2 ) 0.030553 0.016713

d. Capitalization Ratio Phillips-Perron Test Statistic

1% Critical Value* 5% Critical Value 10% Critical Value *MacKinnon critical values for rejection of hypothesis of a unit root. Lag truncation for Bartlett kernel: 2 Residual variance with no correction Residual variance with correction
Source: Eview 4.0 results

-4.060648

-4.6405 -3.3350 -2.8169

( Newey-West suggests: 2 ) 0.000954 0.000423

e. Value Traded Ratio Phillips-Perron Test Statistic

1% Critical Value* 5% Critical Value 10% Critical Value *MacKinnon critical values for rejection of hypothesis of a unit root. Lag truncation for Bartlett kernel: 2 Residual variance with no correction Residual variance with correction
Source: Eview 4.0 results

-3.866319

-4.6405 -3.3350 -2.8169

( Newey-West suggests: 2 ) 0.001932 0.000933

f. Turnover Ratio Phillips-Perron Test Statistic

1% Critical Value* 5% Critical Value 10% Critical Value *MacKinnon critical values for rejection of hypothesis of a unit root. Lag truncation for Bartlett kernel: 5 Residual variance with no correction Residual variance with correction
Source: Eview 4.0 results

-3.514315

-4.6405 -3.3350 -2.8169

( Newey-West suggests: 2 ) 0.001077 0.000280

Appendix III
a. Growth Domestic Product and Capitalization Ratio Sample(adjusted): 1989 2008 Included observations: 18 after adjusting endpoints Trend assumption: Linear deterministic trend (restricted) Series: GDP CAPR Lags interval (in first differences): 1 to 1 Unrestricted Cointegration Rank Test Hypothesized Trace 5 Percent No. of CE(s) Eigenvalue Statistic Critical Value None ** 0.908814 21.86859 12.53 At most 1 0.287320 2.709787 3.84 *(**) denotes rejection of the hypothesis at the 5%(1%) level Trace test indicates 1 cointegrating equation(s) at both 5% and 1% levels 1 Percent Critical Value 16.31 6.51

Hypothesized Max-Eigen 5 Percent 1 Percent No. of CE(s) Eigenvalue Statistic Critical Value Critical Value None ** 0.908814 19.15881 11.44 15.69 At most 1 0.287320 2.709787 3.84 6.51 *(**) denotes rejection of the hypothesis at the 5%(1%) level Max-eigenvalue test indicates 1 cointegrating equation(s) at both 5% and 1% levels
Source: Eview 4.0 results

b. Growth Domestic Product and Turnover Ratio Sample(adjusted): 1989 2008 Included observations: 18 after adjusting endpoints Trend assumption: Linear deterministic trend (restricted) Series: GDP TOVR Lags interval (in first differences): 1 to 1 Unrestricted Cointegration Rank Test Hypothesized Trace No. of CE(s) Eigenvalue Statistic 5 Percent Critical Value 1 Percent Critical Value 16.31 6.51

None * 0.799778 13.59004 12.53 At most 1 0.086460 0.723424 3.84 *(**) denotes rejection of the hypothesis at the 5%(1%) level Trace test indicates 1 cointegrating equation(s) at the 5% level Trace test indicates no cointegration at the 1% level Hypothesized No. of CE(s) Eigenvalue Max-Eigen Statistic 5 Percent Critical Value

None * 0.799778 12.86661 11.44 At most 1 0.086460 0.723424 3.84 *(**) denotes rejection of the hypothesis at the 5%(1%) level Max-eigenvalue test indicates 1 cointegrating equation(s) at the 5% level Max-eigenvalue test indicates no cointegration at the 1% level
Source: Eview 4.0 results

1 Percent Critical Value 15.69 6.51

c. Growth Domestic Product and Value Traded Ratio Sample(adjusted): 1989 2008 Included observations: 18 after adjusting endpoints Trend assumption: Linear deterministic trend (restricted) Series: GDP TVTR Lags interval (in first differences): 1 to 1 Unrestricted Cointegration Rank Test Hypothesized No. of CE(s) Eigenvalue None * At most 1 0.859334 0.000266 Trace Statistic 15.69304 0.002128 5 Percent Critical Value 12.53 3.84 1 Percent Critical Value 16.31 6.51

*(**) denotes rejection of the hypothesis at the 5%(1%) level Trace test indicates 1 cointegrating equation(s) at the 5% level Trace test indicates no cointegration at the 1% level Hypothesized No. of CE(s) Eigenvalue Max-Eigen Statistic 5 Percent Critical Value 1 Percent Critical Value

None ** 0.859334 15.69091 11.44 15.69 At most 1 0.000266 0.002128 3.84 6.51 *(**) denotes rejection of the hypothesis at the 5%(1%) level Max-eigenvalue test indicates 1 cointegrating equation(s) at both 5% and 1% levels
Source: Eview 4.0 results

Appendix IV Multiple Least Squares Regression Result

Dependent Variable: GDP Method: Least Squares Date: 07/22/10 Time: 11:24 Sample: 1989 2008 Included observations: 20 Variable Coefficient C 4.661980 CAPR 4.089154 TOVR 0.320616 TVTR -0.108281 R-squared 0.977807 Adjusted R-squared 0.973646 S.E. of regression 0.105399 Sum squared resid 0.177743 Log likelihood 18.85272 Durbin-Watson stat 2.045859
Source: Compiled from Eview 4.0

Std. Error t-Statistic 0.389531 1.196820 0.674541 6.062128 0.391020 0.819949 0.716467 -0.151132 Mean dependent var S.D. dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic)

Prob. 0.2488 0.000016 0.4243 0.8818 3.458089 0.649253 -1.485272 -1.286125 234.9857 0.000001