capital mkt termpaper
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CHAPTER ONE
INTRODUCTION
The Nigerian stock exchange is a self regulatory body that supervises the
operations of the formal capital market. it provides a mechanism for mobilizing
private and public savings, and making them available for productive purposes.
The NSE a means for trading in new and existing securities and encourages
enterprises of different scales to gain access to public listing. It also regulates
the market and protects the investors. it protects the main exchange for
relatively large enterprises and the second tier security market (SSM) for small
and medium scale enterprises. Since the inception of the NSE the securities
listed have grown from 8 in 1961 to nearly 260 in 2002 and counting,
consisting of government bonds /stocks, industrial loans, debenture/
preference stocks and equity /ordinary shares of companies. Unit trusts listed
on the Exchange are designated as memorandum q uotations.
The Exchange is a membership institution, with 296 dealing and non dealing
members as at end 2002. The dealing members are stock brokage firms, while
the non dealing firms are issuing houses, registrars, etc, as well as individuals
who are distinguished in capital market activities. The NSE is governed by a
council, which is presided over by a president. The members of the council are
elected at the Annual General Meeting. The functions of the council include
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the following: granting of quotation and listing of securities; formulating rules
and regulations for the stock market; enforcement of discipline among
members of the Exchange; dealing with the complaints about and amongst
brokers and the investors; and protecting of Investors interest.
The Nigerian stock market came into existence in September 15th
1960 with
the establishment of Lagos stock Exchange which became operational in June
5, 1961. In December 5, 1977, following recommendations of the government -
financial system review committee of 1976; the Lagos stock exchange was
renamed and reconstituted into the Nigerian stock exchange. T he exchange
has since then been the hub of the Nigerian capital market and has been
operating through stock brokers or dealers who intermediate loan able funds
between lenders and borrowers.
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CHAPTER TWO
STOCK MARKET DEVELOPMENT AND PRIVATE INVESTMENT GROWTH IN
NIGERIA
All over the world the capital market has played significant roles in national
economic growth and development. One intermediary in the market that
operates a rallying point for the overall activities is the stock exchange. It is a
common postulation that without a functional stock market, the capital market
may be very illiquid and unable to attract investment. Essentially, the stock
market provides liquidity, contributes to capital formation, and investment risk
reduction by offering opportunity for portfolio diversification.
The liquidity role stands out clearly as the most significant among the
numerous functions provided by the stock market. In the words of Levine
(1991, 1997), without o liquid stock market, many profitable long term
investments would not be undertaken because savers may be reluctant to tie
up their investments for long periods of time. The stock market mainly
provides liquidity by enabling firms to raise funds through the sale of securities
with relative ease an speed. Through this catalyst role, the stock market is able
to influence investment and economic growth in general. As argued by
Mohtadi and Agarwal (2004), large stock markets lower the cost of mobilizing
savings, faciliting investments in the most productive technologies.
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Previous studies have mainly tried to examine the nature of the c asualties
between stock market and economic growth. Some researchers argue that a
country constitute the key drivers of stock market development. Others tend
to argue that it is rather growth in the stock market that spurs economic
growth and development. Of the empirical evidences backing up both claims,
no sharp demarcation yet existed between the developments in the financial
markets, in general, and national or regional economic development. The
whole controversy boils down to the paradox of the egg and the hen, which is
older .
The fact essentially is that no matter the extent of causality that exists, the
main essence of stock market is to consolidate growth in the financial systems,
and enhance economic development. According to Yartey and Adjasi (2007),
for instance, the establishment of stock markets in Africa is expected to boost
domestic savings and increase the quality of investments. Citind Singh (1997),
they emphasize that in principle, the stock market is expected to accelerate
economic growth by providing a boost to domestic savings and increasing the
quantity and the quality of investment. Equally, stock exchange can increase
economic growth by making available information on firms prospects and
redistributing investible capital. Supporting this view, in the case of Africa,
Yartey and Adjasi (2007) establish that the stock markets have contributed to
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the financing of the growth of large corporations in certain African countries
and that large corporations in Africa have made considerable use of the stock
market to finance their growth.
In the case of Africa, however, little proofs are available to support arising
theoretical projections on the role of the stock market in encouraging capital
formation and investments. This situation has instead helped to tilt public
opinion towards believing the allegation that emerging African economies
have not felt the impact of huge growth recorded by the stock market over the
years, Thus, the primary goal of this paper is to examine the nature of the
relationship that exists between growth in the stock market and the level of
investment flows in Nigeria. The choice of Nigeria as a case study is justifiable
considering the significant upward movements in the key market indicators
such as stock market capitalization, value of traded securities, as well as the
All-share index. Given these rising trends in the Exchange, there is need to
establish an empirical link on how the economy has so far benefited.
THE STOCK EXCHANGE AND THE CAPITAL MARKET
CAPITAL MARKET
The role of capital market in the economic development of Nigeria has
continued to attract increasing attention among policy makers This derives
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from the recognition that a deeper broader and better functioning capital
market provides long term finance which is necessary for economic growth
and development.
A capital market is a network of financial institution and facilities that interact
to mobilize and allocate long term savings in an economy, the long term funds
are exchanged for financial assets issued by borrowers or traded by holders of
outstanding eligible instruments. Therefore it provides services that are
essential to a modern economy mainly by contributing to capital formation
through financial intermediation. Financial advisory services and managerial
skill development. In addition, the capital market facilitates portfolio
diversification that allows savers to minimize returns on their assets and
reduce risks. Consequently, an efficient market optimizes the amount of
savings that finances investments at any level of saving.
In Nigeria, the capital market provides funds to industries and government to
meet their long term capital requirements for fixed investments like building,
plants, and other infrastructure. Empirical evidence however, indicates that
the role of the capital market in Nigeria is limited. This is shown by its own low
contributions to the level of capital mobilizations and investments as
evidenced by the low market capitalization over the years.
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The stock exchange is the very hub of the capital market; the pivot, without
this facility and the chance, which is thus available to investors to liquidate
their investments or adjust their portfolio whenever they desire to do so, it is
doubtful if there would be any motivation to invest in securities. Most savers
would then simply hold on to their funds in cash or ba nk deposits which
guarantees that they will be able to meet the fundamental purpose of their
savings; such motive is usually quite far from the desire to invest.
Besides, there is a strong possibility that even a strong possibility that even
where savings remain constant in aggregate terms, that without the safe guard
and the guarantee of the quality and the resultant confidence generated by
stock exchange listing, most savers could not be easily persuaded to place their
money in securities, issued by firms to place their money in securities, issued
by firms whose competence or integrity they could not trust. Savers would
then probably put their money instead in small, owner- managed business
concerns. The implication of this for the entire economy could be a serious
handicap being placed on the promotion of large scale enterprises and with
this, a severe limitation on the nations production capacity. Because of the
impact of the scale on cost of production, prices and loss of international
competitiveness, the marketability of securities, which the stock exchange
impact on, therefore has extremely important implication for the individual
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saver, the investor or fund user as well as the nation as a whole. This
tremendous impact that the capital market introduces to the capital formation
and investment process, ultimately to the promotion of individual and nation
well being and posterity, makes it seem today a vital component of the total
strategy for promoting national economic development. It was probably
because of these attractions that the emerging Nigerian nation in 1961 elected
also far the establishment of the stock exchange in Lagos.
The activities of the stock exchange fall into two broad categories, the primary
and the secondary markets. The primary market is concerned with the initial
issuance of securities. Such an issue can take any of the following forms; offer
for subscription, offer for sale, by introduction, private placement and right
issue. The market for outstanding securities(the secondary market) enhances
the new issues market in many ways, by providing the means by which
investors can monitor the value of their shares and liquidate them when they
so desire. The secondary market augment supply of funds to the primary
market stated somewhat differently. If there was no secondary market in
which investors could cash their investment in listed securities they choose,
many investors may not buy issues in the first place. From the perspective of
the overall company, the secondary market is particularly important, as it
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makes it possible for the economy to ensure long term commitments in real
capital.
CAPITAL MARKET GROWTH AND DEVELOPMENT
The capital market was established in1961 to provide and sustain the capital
requirement of the Nigerian economy. The mechanism for mobilizing long
term funds for investment purposes in the Nigerian stock exchange between
1961 and 1997, the stock exchange operated a manual call over system with its
inherent problems, which could be summarised as undue delays, high risks and
manipulations due to long transaction cycles, minimal transparency and
therefore a general lack of confidence in the system (NSE 2006)
Information and communication technology (ICT) transformation in the
Nigerian Capital Market began in 1997 with the establishment of the
automated trading system (ATS). This is a system that enables dealers trade
through a network of computers connected to a server using the queuing
system. Thus stock brokers, investors and dealers have equal access to
information for purchase and sale of securities and can execute transactions
through a network of computers even from remote locations during Exc hange
trading hours. This has enabled more participants to trade daily boosting
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liquidity and creating opportunity for price discovery. The ATS eliminated price
manipulations which was prevalent during the call over system and also
reduced transactions cycles.
In 1999 the Nigerian stock exchange introduced a computerised clearing,
settlement and delivery system for transactions in listed share s known as the
central securities clearing system (CSCS). The CSCS is interfaced with the ATS
thereby facilitating a T+3 transaction settlement cycle. In addition the CSCS is
responsible for dematerialization share certificates of quoted companies and
storing them in electronic form in a central depository. Other ICT adoptions
include the CSCS trade alert, phone- in- service alert, E- bonus, and E-dividend
payments.
CAPITAL MARKET DEVELOPMENT INDICATORS IN NIGERIA
MARKET SIZE
Economic theory postulates that market size is positively correlated with the
ability to raise capital and diversify risks. Therefore, it follows that the larger
the market, the greater its ability to attract capital from surplus sectors of the
economy, and also the more efficient its ability to diversify risks. Two measures
of stock market size considered are the number of listed shares and market
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capitalization. From various researches, it was proven that there was
tremendous increase in the number of shares listed shares from 8 in 1961 to
288 in 2006 Taking into account new listings and de -listed securities. The trend
evidences a continuous rise in the activity of the market especially in the
equity market mostly powered by banks, although the debt and bonds market
witnessed a decline after 1990. The plausible explanation for this increase,
other than government policies like the reduced listing requirements for the
second tier security market, is the expansion in availability of information,
which has led to increase in investor confidence and transparency in the
capital market, all brought about by the adoption of information in the
Nigerian stock exchange. The second measure of the market size in Nigerian
capital market is the value of market capitalization. This is an aggregate value
of the total number of issued and paid - up share capital multiplied by the
prevailing share capital multiplied by the prevailing share price for each
company. The Securities and Exchange Commission explains market
capitalization as an indicator of investors perception of assignment of a
company and by implication the market as a whole
LIQUIDITY:
Liquidity refers to the ability of the investors to easily buy and sell shares or in
other words the ease of acquiring assets and converting such investments in
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the stock exchange into cash. Three measures of liquidity considered are total
value traded, total volume traded and the All share index. The aggregate value
of approved new securities grew significantly from N3 BILLION in 1992 to an all
time high of N552.8 BILLION in 2006. The decrease in new listings in 2006 was
due to new government policies on increase in capital base for companies
resulting in mergers and acquisition
The stock exchange has over (2) two million individu al investors and above 300
institutional investors including NPF now NSITF, insurance, government and
parastatals using the facilities of the exchange. In about forty years history, the
NSE has been devoid of any major fraud, shocks and scandals except the one
recently witnessed as regards fraudulent sale of share certificate relating to
Nestle foods Nigeria plc. In this regard, the listing requirements and code of
conduct of members and staff of the NSE have helped to ensure;
(i) Disciplined public accountabil ity
(ii) Continued survival and improved performance of the quoted
companies
(iii) Disciplined management of listed companies and market operators
(iv) An increasing pool of ingestible funds for economic development.
The role of Nigerian stock exchange as a vehicle of rate mobilization of long
term capital and platform for buying and selling of shares/stocks is not only
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geared towards the socio-economic aspiration of the nation; it is also efficient
and cost conscious.
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CHAPTER THREE
STRUCTURE; PERFORMANCE OF THE NIGERIAN STOCK EXCHANGE
STRUCTURE: The Nigerian Stock Exchange (NSE), the apex body on the
Nigerian capital market was established in 1960 as the Lagos stock Exchange.it
later became the Nigerian Stock Exchange in 1977. At present,there are six
branches with each having a trading floor. The branch in Lagos was opened in
1961, Kaduna 1978, Port Harcourt 1980, Kano 1989, Onitsha February 1990,
Ibadan August 1990. The exchange which started with only 19 securities traded
on its floor in 1961 has about 257 securities as at 2002 with a total
capitalization of approximately N763.9 billion . the total value of reading
transactions on the exchange rose from N13.6 billion in 1998 to N59.0 billion in
2002. As at 2003, 180 companies were listed on the first tier market of the
stock exchange and there were 19 listed on the second tier security market.
There is an increase in all the parameter used to measure the performance
summary of the Nigerian stock exchange from the year 2003 -2006.
However the stock market is illiquid, small and volatile. Although the number
of listed securities is increasing, trading activities is very thing due to the
observed reluctance of institutional and individual investors to trade in the
secondary market.
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NSEA REVIEW OF PERFORMANCE IN 2009 AND THE OUTLOOK IN 2010
The harsh operating environment hampered the performance of most
companies as shown in the quarterly results of Quoted companies. Rising
unemployment, weakened purchasing power and weakened investor
confidence further exerted downward pressure on the stock market. The
impact of the global meltdown worsened the scenario as foreign investors
shunned assets considered risky while local investors sought refuge in short
term securities. Also the initial negative reaction to the decision of most banks
and insurance companies to make full provision for their non performing
assets dampened investors appetite and slowed down market recovery . In the
long term; the decision is healthy for the market, in the sense that it would
show a true and fair position of the institutions concerned.
ACTIVITIES IN THE NIGERIAN STOCK MARKET
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 2007/08 remained locked in, as many of the issuers have
not yet applied to the Nigerian stock Exchange for listing .
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Turnover on the exchange closed the year at N685.72 billion or 2.9% of
GDP,down by 71.2% from the N2.4 trillion (10.4% of GDP) RECORDED IN 2008.
Average daily Activities dropped from 777.65 million shares worth N9.55 billion
in 2008 to 414.73 million shares valued at N2.8 billion in 2009.
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 bond sector were very minimal,
accounting for only N119.530. The preference stock sub sector was inactive in
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 market (OTC) for the federal government bonds, as agalnst
N10.44billion in 78,248 deals recorded in 2008.
Overall, the exchanges turnover ratio dropped from 21.86% in 2008 to 13.26%
in 2009, attributing to the decline in stock prices. The following is a list of thr
years 20 most active stocks (by turnover volume);
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S/No COMPANY VOLUME TRADED(Billion shares)
1. Access bank plc 6. 348
2. UBA Plc 5.405
3. Wema Bank Plc 4.913
4. First bank of Nigeria Plc 4.804
5. Guaranty trust Bank Plc 4.413
6. Zenith Bank Plc 3.823
7. Intercontinential Bank Plc 3.209
8. FinBank Plc 3.004
9. First city monument Bank 2.929
10. Oceanic bank International 2.902
11. Diamond Bank Plc 2.849
12. Fidelity Bank Plc 2.805
13. Skye Bank Plc 2.541
14. ALLCO INSURANCE PLC 2.388
15. Gold link Insurance Plc 2.203
16. Bank PHB Plc 1.938
17. Investment & Allied Assurance Plc 1.795
18. Chams Plc 1.789
19. Transnational Coporation of Nig LTD 1.718
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20. International Energy insurance Plc 1.666
The banking and insurance subsectors accounted for 18 of the Top 20
companies by turnover volume. Consequent upon their being the most
capitalized subsectors while also having the largest float. Information and
Communication Technology and Conglomerates had one representative
each to complete the top 20 list.
Trading in Rights
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 N375.05 million value of transactions
in the previous year. The companies whose rights were traded during the year
include:
Cadbury Nigeria Plc
Elema Oil & Gas Plc
Foreign Portfolio Investment
Despite price declines and the shunning of risky investments, foreign investors
continued to demonstrate confidence in the Nigerian economy during the
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year. Following modest recovering in their home markets, some of our
erstwhile foreign investors returned while new investors sought opportunities,
considering the key attributes of high returns, liquidity and safety of
investments. Hence, despite the global recession, our market remained
attractive to foreign investors and portfolio managers seeking cheap equities
and high-yielding bonds. Interim statistics show purchases (inflow) by foreign
investors during 2009 to be in excess of N228.986 billion representing 33.4% of
the aggregate turnover an increase, when compared with the N153.457
billion recorded in 2008. Consequently, total sales (outflow) during the year in
excess of N195.583 billion, culminating in a net inflow of N33.403 billion, a
reversal of the net outflow of N480.5 billion in 2008.
Market Capitalization
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 year -end, seven
subsectors recorded increased market capitalization of between 6.4% and
77.3%. Two subsectors (Machinery Marketing and Aviation) did not record any
change in market capitalization.
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At the end of the year, the following 20 companies emerged with the highest
market capitalization, in descending order:
S/No Company NSE Sector
Classification
Market
Capitalization
(NBillion)
Annual
Change
1 First Bank of Nigerian Plc Banking 407.54 (22.35)
2 Nigerian Breweries Plc Breweries 401 29.8
3 Zenith Bank Plc Banking 341.6 (7.3)
4 Guaranty Trust Bank Plc Banking 289.13 48.3
5 UBA Plc Banking 232.81 2.7
6 Guinness Nigeria Plc Breweries 188.05 28.1
7 Dangote Sugar Refinery
Plc
Food &
Beverages
181.2 2.6
8 Benue Cement Company
Plc
Building
Materials
168.41 198.7
9 Nestle Nigeria Plc Food and
Beverages
158.2 25.1
10 Stanbic IBTC Bank Plc Banking 140.1 (31.5)
11 Ecobank Transnational Inc The Foreign 130.4 (52.31)
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Listings
12 Access Bank Plc Banking 124.92 7.5
13 First City Monument Bank
Plc
Banking 116.5 18.54
14 Diamond Bank Plc Banking 107.12 (0.8)
15 Lafarge Cement WAPCO
Nig. Plc
Building
Materials
90.05 17.65
16 Oando Plc Petroleum
(Marketing)
85.1 17.81
17 Union Bank of Nigeria Plc Banking 81.1 (53.95)
18 PZ Cussons Nigeria Plc Conglomerate
s
79.41 122.42
19 Ecobank Nigeria Plc Banking 76.73 (62)
IMPORTANCE OF STOCK MARKET
The stock market plays a pivotal role in the growth of the industry and
commerce of the country that eventually affects the economy of the country
to a great extent. This is the reason that the government, industry and even
the central banks of the country keep a close watch on the happenings of the
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stock market. The stock market is important from the industrys point of view
as well as the investors point of view.
Whenever a company wants to raise funds for further expansion or setting up
of a new business venture. They have to either take a loan from a financial
organization or they have to issue the shares through the stock market. In fact
the stock market is the primary source for any company to raise funds for
business expansions. If a company wants to raise some capital for the business
it can issue shares of the company that is basically part ownership of the
company. To issue shares for the investors to invest in the stocks, a company
needs to get listed to a stock exchange and through the primary ma rket of the
stock exchange they can issue the shares and get the funds for business
requirements. There are certain rules and regulations for getting listed at a
stock exchange and they need to fulfil some criteria to issue stocks and go
public. The stock market is primarily the place where these companies get
listed the shares and raise the funds. In case of an already listed company, they
issue more shares to the market for collecting more funds for business
expansion. For the companies which are going public for the first time, they
need to start the Initial public offering or the IPO. In both cases these
companies have to go through the stock market.
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This is the primary source of the stock exchange and thus they play the most
important role of supporting the growth of the industry and commerce in the
country. That is the reason that a rising stock market is a sign of a developing
industrial sector and a growing economy of the country. Of course this is just
the primary function of the stock market and just half of the role that the stock
market plays.
The secondary function of the stock market is that the market plays the role of
a common platform for the buyers and sellers of thes stocks that are lister at
the stock market. It is the secondary market of the stock exchange where retail
investors and institutional investors buy and sell the stocks.
For investing in the stock or to trade in the stocks, the investors have to go
through the brokers of the market. Brokers actually execute the buy and sell
orders of the investors and settle the deals to keep the stock trading alive. The
brokers basically act as middlemen between the buyers and the sellers. Once
the buyer places a buy order in the stock market, the broker finds a seller and
the deal is closed. All these take place at the stock market and it is the demand
and supply of the stock of a company that determines the price of the stock of
that particular company.
So the stock market is not only providing the much needed funds for boosting
the business, but for also providing a common place for stock trading. It is the
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stock market that makes the stock a liquid asset unlike the real asset
investment. It is the stock that makes it possible to sell the stocks at any point
in time and get back the investment along with the profit. This makes the stock
much more liquid in nature and thereby attracting investors to invest in the
stock market.
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CHAPTER FOUR
INVESTORS SENTIMENT, STOCK MARKET LIQUIDITY AND ECONOMIC
GROWTH IN NIGERIA
The way the investor perceive the stock market goes a long way in determining
not only the return or the stock prices, but also the future and growth of the
capital market. Sentiment of the investors play significant roles in determining
prices, the rate of turnover in the stock market and of course its capitalization.
Thus investors sentiment (their pessimism or optimum about stocks) has
become a factor to be reckoned with more so, as it affects liquidity in the stock
market and economic growth.
In offering a stock to the market, the psychology and perception of the would-
be-investors come to play. Their sentiment determines whether an offer would
be fully subscribed. If under subscribed whether or not to extend the offer
period. Empirical evidences abound that investors confidence is significantly
associated to stock market growth in both developed and developing
countries. Several studies have proved the long run relationship between stock
market liquidity and economic growth, a lot others have equally established a
relationship between sentiments and capital market liquidity.
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CHAPTER FIVE
CONCLUSION
Several studies have found a strong positive relationship between the impact
of the Stock Exchange in the stock market development and Economic growth
in Africa. In the long run, a 1%increase in the liquidity rather than in the size of
the stock market, could account for up to 3.7% points of African economic
growth(Yartey and Adjasi 2007). In the short term there is evidence in favour
in the increased importance of stock market development in economic growth.
Stock market development could well be a means to help African countries to
overcome the growth impasse caused by the Global Financial Crises. This work
goes further to examine the role of the Capital market in the economic
development of a nation which cannot be over emphasised. It further goes
ahead to expose the weaknesses in the Nigerian capital market caused by The
Global Economic Meltdown. Yet the hope for the revival of the stock exchange
is not lost. It requires dedication and sincerity on the part of the regulators and
the participants. One thing must be understood that the security price may not
be able to return to the pre-downturn era in the short run.