Impact of Stock Market Performance on Nigerian Economic Growth

Abstract

Though, the economic theory indicates a positive relationship between stock market and economic growth, but the causal relationship between the variables remains a topical issue among researchers. In addition to the apparently slow rate of economic growth in Nigeria, this research work is prompted by the need to investigate the direction of causality between stock market performance and economic growth indices in Nigeria with the view to establish the cause-effect relationship between the two variables. Economic growth is represented by Gross Domestic Product (GDP), while stock market performance is proxied by market capitalization (MKTCAP), value of transactions (VALTRAN), volume of transactions (VOLTRAN), total listed companies (TOLIST) and all share index (ALLSI). Data were obtained through various secondary sources such as; Central Bank of Nigeria (CBN) and Nigeria Stock Exchange (NSE), Annual Reports. Ordinary least square (OLS), Regression and Granger Causality Wald Tests are respectively employed for assessing the relationship and the direction of causality between the variables under consideration. The overall results of OLS, Regression reveal a significant relationship between stock market performance and economic growth indicating MKTCAP as the strongest predictor variable, while predictor variables, such as, VOLTRAN and ALLSI have insignificant inverse relationships with GDP. Causality test shows that causality runs from economic growth to stock market performance. The study recommends that, Government should put in place effective fiscal policies and incentives (such as, reduction in cost of sourcing fund from stock market, reduction of withholding tax rate on dividends, encouragement of payment of high dividends to investors and investment of certain percentage of civil servants and contractors’ earnings on shares) that can stimulate both investors and users of long term fund, so that high level of patronage in Nigerian Stock Market can be encouraged.