CHAPTER ONE

1.0 INTRODUCTION

1.1 BACKGROUND OF STUDY

       Stock market development and economic growth is not a virgin issue in economic literature and it has its origin from the concept provided by Schumpeter in 1912. The role of stock market in mobilizing resources from surplus units and allocating same to deficit units is a stimulus to investigate development in Nigeria’s stock market in relation to economic growth.

       To accelerate economic growth and development in Africa has propelled the establishment of many stock markets in many African nations. Yartey et al., (2009) Note that reforms in the financial system of most African countries are focused to the development of the stock market to help in capital accumulation through effective financial intermediation.

       This is because of the vital role of finance in economic growth and development of developing countries. Emerging economies are faced with financial constraints which are due to underdeveloped nature of the financial system. Oke et al., (2010) opine that sustainable growth and development will be attained through effective intermediation function of the stock market.   

       The growth of an economy depends on the level of development in the financial system which may be banks based or market based. In the bank based financial system, the banking system plays the greater role of capital mobilization for economic development compared to the stock market. On the other hand, in stock market based financial system, the stock market is seen as heaven for mobilization and allocation of resources for long term economic growth and development (DemirgucKunt et al, 2007).

       The main essence of the stock market is to consolidate growth in the financial systems, and enhance the consequent impact of the latter on economic development. According to Yartey and Adjasi (2007), the establishment of stock markets in Africa is expected to boost domestic savings and increase the quantity and quality of investments. Singh (2007) emphasized that in principle, the stock market is expected to accelerate economic growth by providing a boost to domestic savings thereby increasing the quantity and the quality of investment 

       States that in bank-oriented financial systems such as Germany and Japan, banks play a leading role in mobilizing savings, allocating capital, overseeing the investment decisions of corporate managers, and in providing risk management vehicles, while in market-oriented financial systems such as England and the United States, securities markets share centre stage with banks in terms of getting society’s savings to firms, exerting corporate control, and easing risk management. Nigeria financial system is bank-oriented as firms’ source financial resources mostly from the banks.

       The stock market is seen as the market for the “big guys”, that is, firms’ with great financial muscle. However, due to the developing nature of the Nigeria stock market and the financial system in general, only few firms are listed on the exchange when compared to its counterpart in South Africa.

1.2   STATEMENT OF THE PROBLEM:

The study on the impact of the role of the stock market in the growth of Nigeria economy came about as a result of instability of stock market due to the rising and falling of exchange rate. Finally, most of the research has been carried out stock market, but not even a single research has been carried out on the impact of the role of the stock market in the growth of Nigeria economy.

1.3   AIMS AND OBJECTIVES OF STUDY

The main aim of this research work is to determine the impact of the role of the stock market in the growth of Nigeria economy. Other specific objectives of the study include:

1. to determine the effect of instability of exchange rate on Nigerian economy.
2. to determine the effect of direct investment participation on the economic growth of the country.
3. to determine the relationship between stock market and the Nigeria economy.

1.4   RESEARCH QUESTIONS               

1      What is the effect of instability of exchange rate of Nigerian economy?

2      What is the effect of direct investment participation on the economic growth of the country?

3      What is the relationship between stock market and the Nigeria economy?

1.5   STATEMENT OF RESEARCH HYPOTHESIS

Hypothesis 1

Ho:   There is no significant relationship between the determinants of stock market and economic growth.

H1       There is significant relationship between the determinants of stock market and economic growth

1.6   SIGNIFICANCE OF STUDY

 The study on the impact of the role of the stock market in the growth of Nigerian economy will be of immense benefit to the entire Nation in the sense that it will educate the government on maintenance and improvement of stock market. Finally the study will contribute to the body of existing literature and knowledge in this field of study and provide a basis for further research.

1.7   SCOPE OF STUDY

The study on the impact of the role of the stock market in the growth of economy will cover for a period of twenty seven (27) years.

1.8   LIMITATION OF STUDY

Financial constraint- Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet).

Time constraint- The researcher will simultaneously engage in this study with other academic work. This consequently will cut down on the time devoted for the research work.

1.9   DEFINITION OF TERMS

Impact:   A marked effect or influence.

Role:        The function assumed or part played by a person or thing in a particular situation.

Stock market:        A stock market, equity market or share market is the aggregation of buyers and sellers (a loose network of economic transactions, not a physical facility or discrete entity) of stocks (also called shares), which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as those only traded privately.

Growth:   The process of increasing in size.

Economy:        The state of a country or region in terms of the production and consumption of goods and services and the supply of money.