Empirical Analysis of Impact of Capital Market Development on Nigeria's Economic Growth (1981–2008) (Case Study: Nigerian Stock Exchange)

This study empirically examined the impact of capital market development on economic growth in Nigeria for the period 1981-2008. The major tool we employed for empirical analysis is a multiple regression analysis model specified on the basis of hypothesized functional relationship between capital market development and economic growth. For capital market development indicators, we considered ratios of value of shares traded, market capitalization, gross capital formation and foreign private investment, to gross domestic product, as explanatory variables, while we used growth rate of gross domestic product as the dependent variable. We introduced an error correction term to capture the flexibility in adjustment to long-run equilibrium. We estimated the model via the ordinary least squares (OLS) techniques. Further, we evaluated the model using relevant statistics. The results showed that while market capitalization, gross capital formation, and foreign private investment individually exerted statistically significant impact on growth of the economy, value of shares traded exerted positive but statistically insignificant impact during the review period. However, the variables jointly exerted statistically significant impact on growth of the economy. In addition, the model exhibited a very high explanatory power and high flexibility in adjustment to long-run equilibrium. The variables time series were stationary at second difference, showed existence of long-run relationship between the two sets of variables, and exhibited stability for the study period. Based on the findings, the study recommended, among others, sustainable development of the capital market to enhance faster rates of capital accumulation for greater productivity gains and economic growth as well as the need to complement market development with real sector macroeconomic policy thrust like significant reduction in lending rates to stimulate investment and manufacturing activities in the real sector and translate capital market gains to real sector output growth. Keywords: Capital Market; Development; Economic Growth DOI: 10.3860/ber.v20i2.1915 DLSU Business & Economics Review 20.2 (2011), pp. 79-96