Assessment of the Contributions of Capital Market to Economic Growth in Nigeria: A Vecm Approach

Nigerian Journal of Management Sciences Vol. 3 No.1, 2013

12 Pages Posted: 10 May 2017 Last revised: 11 May 2017

See all articles by Andohol Jerome

Andohol Jerome

Benue State University

Paul Gbahabo

Stellenbosch University - Business School (USB)

Date Written: December 30, 2013


This paper empirically examines the relationship between capital market and economic growth in Nigeria. The neo-classical growth model which employs the Vector Error Correction Methodology estimate the results was used as the basis for the model specification. Secondary data , which was sourced from Central Bank of Nigeria(CBN) statistical bulletins was used for the analysis. The study finds a long-run positive relationship between Capital Market and Foreign Direct Investment as well as a long-run negative relationship between Capital Market and Domestic Investment within the period 1986 to 2011. The disequilibrium error of 17.1% implies that in an event of a shock in the system in any given year, it will take a little over four years to correct the shock. The study recommends that regulatory authorities should initiate policies that will alleviate the challenges faced by domestic investors.

Introduction In the last few decades, the strategic role of the capital market as an efficient conduit of financial intermediation has been well recognized by researchers, academics, and policy makers as one of the key drivers of the economic growth of a country. Oke and Adeusi (2012), Yabara (2012), Ewah et al (2009) and Akingbohungbe, (1996) in their contributions to literature avails that capital market (which consist of equity markets and bond markets) can be defined as the market where medium to long-term finance can be raised for expansion in firms that consequently fosters the economic growth of a nation. They described it as a platform through which long-term funds are made available by the surplus economic units to the deficit economic units. Since capital market has a very profound implication for socio-economic development, it offers a variety of financial instruments that enable economic agents to pool, price and exchange risk, through assets with attractive yields, liquidity and risk characteristics. It also encourages saving in financial form, which is very essential for government and other institutions in need of long term funds (Nwankwo, 1991). On the whole, Capital market is a veritable tool that mobilizes resources at a lower cost for medium or long term use by firms or Government, which is critical to economic growth.

On the other hand, Ezeoha et al (2009) simply avails economic growth to occur when there are annual increases in per capita Gross Domestic Product (GDP). The components of GDP depend on whether it is mathematically estimated from an expenditure approach or from an income approach. However, either of the approaches in use for the computation of GDP would yield the same aggregated result. Mishra, et al (2010) provide evidence from cross-country studies to support the view that an efficient functioning capital market provides liquidity. Their study also contributed to the capital formation investment risk reduction nexus, by offering knowledge on the opportunities that exist via portfolio diversification. Levine (1996); Mohtadi andAgarwal (2004) articulates on the influences of capital portfolio diversification and economic growth. They revealed that a well-functioning capital market should have market depth, breadth and sophistication so as to avoid the tendency of being equity dominated but rather comprising other fixed instruments such as bonds. Patoda and Jain (2012) further argued that diversification decreases the risk of portfolios, which is a combination of different investment products to include stocks and bonds. As an investment, stock market typically is viewed as a financial asset that will fluctuate and influence political, social, or economic fabric of a country. In this regard, a company's performance will necessitate its investors to invest in different sectors with different bonds to diversify the risk of losses. According to Yartey and Adjasi (2007), inefficient capital market has led to the over-dependence on bank market with negative consequences which include inability to raise finances for a wide range of infrastructure projects that directly contribute to economic growth and development; potential for over-valued equity markets as there is limited alternatives; exposure of borrowers to short term market volatilities; funding mismatch arising from the funding of long term capital projects with short term borrowings.

There exists voluminous literature concerning the role of a well-functioning capital market in the process of economic growth of a country. Some of the early contributions in this regard came from Schumpeter (1912), McKinnon (1973) and Shaw (1973). These early works, though insightful, lack rigorous analytical structures.

The 1990s witnessed a growing body of works, which built on a series of analytical frameworks that showed how a well-functioning financial intermediary and market contribute long run economic growth. Mishra and Mishra et al (2010) citing Levine (1996), Jacque (2001),Tufano (2003), Chou (2007) Agarwal (2000),S arkar (2006), Capasso (2006), Kamat and Murphy (2007), Agrawalla and Tuteje (2007), Deb and Mukherjee (2008), and Chakraborty (2008) indicated how all these scholars have contributed a lot to the literature in this direction. These studies dwelled on the relationship between capital market and certain macroeconomic variables such as business returns, inflation, interest rates, exchange rates and market volatilities. The results have revealed mixed relationships ranging from positive to negative and in some instances inconclusive.

In view of the debate as to whether a well-developed capital market or the lack of it suggests positive effects on economic growth and development, this study intends to complement works in literature in this regards.

Specifically, the study seeks to assess the extent to which the Nigeria capital market impacted on its economic growth given the background of the global economic crisis. Upon completion, this study shall benefit policymakers and all practitioners in the Nigerian capital market.

The rest of the paper is organized as follows: Section 2 outlines the review of related literature; Section 3 discusses the data and methodology; Section 4 analyses the data; and Section 5 highlights implication for research and concludes the discussion.

Keywords: Capital Market, Economic Growth, Vector Auto Regression

Suggested Citation

Jerome, Andohol and Gbahabo, Paul, Assessment of the Contributions of Capital Market to Economic Growth in Nigeria: A Vecm Approach (December 30, 2013). Nigerian Journal of Management Sciences Vol. 3 No.1, 2013, Available at SSRN:

Andohol Jerome

Benue State University ( email )

Along Gboko Rd, P.M.B.102119 Makurdi-Gboko Rd
Makurdi, 97001

Paul Gbahabo (Contact Author)

Stellenbosch University - Business School (USB) ( email )

Carl Cronjé Drive
CAPE TOWN, Cape Town 7535
South Africa

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