Effect of Market Capitalization on Nigerian Economic Growth

Abstract

The recent financial crisis has shown that there is a severe economic impact of the financial system. The financial market in any country remains one of the most important pillars for long-term economic growth and development. This study investigates the effect of stock market capitalization on Nigerian economic growth. Gross Domestic Product was used as proxy for economic growth and was expressed as a function of Stock Market Capitalization (SMcap). This study employed Quantitative research design through the use of time series data. This includes a descriptive analysis and econometric analysis of secondary data covering the period of 22 years from 1998 to 2019 obtained from Central Bank of Nigeria Annual Statistical Bulletin, Central Bank of Nigeria Annual Report and Statement of Accounts (various issues), NSE books, and SEC Market Bulletins. Augmented Dickey Fuller (ADF) unit root test, Co-integration test and Vector Error Correction Model (VECM) were employed in the analysis. From the ADF unit root test conducted, it was revealed that Gross Domestic Product and SMcap were non-stationary in levels but at first differencing; both variables became stationary at 5% level of significance. The results of the VECM model indicated that SMcap has a positive and significant effect on Gross Domestic Product and it is estimated on the average that 1% increase in stock market capitalization will lead Gross Domestic Product to increase by 84%. It was thus concluded that stock market capitalization has a significant effect on Nigerian economic growth measured by Gross Domestic Product. The study recommends that the Nigeria government should place priority on the development of the stock market through formulated effective monetary and fiscal policy management and in fact a stable macroeconomic environment.