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Effect of economic recession on stock price of companies

Effect of economic recession on stock price of companies

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

       The current global economic recession is indeed pandemic .This contagion has caught up with countries like Nigeria, which has thought that by not being fully integrated into the world economy, they could at worst receive a mere scratch. Globalization has made the economic meals-trom to be truly global even more than what obtained in the great depression (peluola, 2009)

       Onyekakeyah (2008), opined that the economic crisis originated from the United State of America (USA) When the financial authorities announced the bankruptcy of lehman brothers, a development seen by many as the largest bankruptcy in the corporate history of the united state. Lehman brothers is a global investment bank that services the financial needs of corporation, institutions, government, and high net-worth investors worldwide. Since 1850(over 150 year) when Lehman Brothers was founded, the corporation has impacted on development around the world, particularly on the economics of major industrials nations (Onyekakeyah, 2008). Amid the shock over the collapse of Lehman brothers, another organization, American International Group (AIG) the largest insurance company in the united state was at the brick of collapse. News of the bankruptcy of these two giant financial institution sent shock waves that created turmoil around the world financial markets (Onyekakeyah, 2008).

       George (2008), define financial meltdown or economic recession as a reduction in the general availability of loan or a sudden tightening of the condition required to obtain a loan from the bank. This is often caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt, when the loan turn sour, and the full extent of bad debt become known. These institution may then reduce the availability of credit by raising interest rate .Turners(2008)in his view opined that financial crunch is generally caused by a reduction in the market process of previously over inflated assets and refers to the financial crisis that results from the price collapse.

       However, Nigerian’s economy which is crude oil export oriented is therefore affected by this economic turmoil through international trade.

       In Onyekakeyah (2008), Nigeria is a one commodity based economy, which makes our situation more precarious. We produce the oil and must have to sale it to earn foreign exchange. Incidentally, the financial crisis is hutting hardest on our major trading partners in America, Europe and Asia. If the economy of these countries continue to face a crunch, the price of stock in Nigeria and also the status of Nigeria stock market and economy at large will be very bad, as she run the risk of reduced commodity export, unlike when the economies of trading partners are sound. This in a way explains the rapidly falling price of oil in the world market from $140 a month ago to around $65 (Editorial opinion Nov. 04, 2008). This development has forced government to review the 2009 budget bench mark downward from $65 to $45. This would reduce government revenue and in turn, affect the provision of goods and services in the coming year.

       Since the beginning of the global economic recession, the share prices of the Nigeria stock market has been sliding (Editorial Opinion, 2008).Many people have argued that government should bail out the stock market in the interest of the investing public. The stock market is the interest of the investors buy and sales shares to their advantage. Buying and selling in this sence, is a personal decision which could result in profit or loss. Before the recession, the market capitalization at the stock market was over N15 trillion. This has fallen to about N9 trillion with a loss of investors fund of about N 6 trillion . for government to bail out this sector, it requires about N6 trillion to boost the share prices. Once this is done, investors would likely sale off to quit, leaving government to own practically all the shares in the stock market. The same goes with the banking sector. This industry is faced with relatively high operating costs occasioned by decaying infrastructure like power, transportation, security among others as well as their inability to give out loans due to the unfolding scenario brought about by the global economic recession.

       Clearly, we have enormous work to do and several step to maintains to cline if we must enhance the Nigeria capital market and the economy at large in regard to her stock price, under this present global recession.

       It’s therefore against this backdrop that this research work dwells on the effect of economic recession on stock price of companies in the capital market.

1.2 Statement of the Problems

       The key subject in global discourse today is the recession of the financial world. According to Muhtar (2009), Nigeria has witnessed sharp drop in market capitalization in the stock market, reduction in budgetary revenues, falling external reserve and market depreciation.

       To rephrase all of this in common language, the reality of the Nigeria situation is that the country’s stock market is at all time low, all those attractive stocks which Nigerian’s used to buy with so much desperation and anxiety have all become Penney stocks. Stockholders in this environment have become villains. Oil, the mainstay of the Nigerian economy has lost it’s value in the international market. Thus, turning national projections adrift. In much specific parlance, Nigeria is likely to become bankrupt if the crisis persists.

       Subsequently, our national reserves are down, and the country’s credit rating is thereby eroded by about twenty three percent (23%). Inflation is Skyrocketing. The question becomes, how do we correct the above anomalies, in this wave of economic down turn, so that efficient stock market, price stability, economic growth and economic diversification can be achieved?

1.3 Objectives of the Study

       The objective of this study is to examine the effect of economic recession on stock price of companies.

       Other specific objectives include:

(i) To know the reason behind the sharp drop of Nigeria’s currency.

(ii) To find out why the oil price lost its value in the international market.

(iii) To explore the root causes of economic recession.

(iv) To make appropriate recommendation at the end of the study.

1.4 Research Questions

       Based on the above objectives, the following research questions are formulated,

(i) What are the roots causes of global economic recession?

(ii) What are the reasons behind the sharp drop in Nigeria’s stock market price?

(iii) Why has the stock price of companies lost its value?

(iv) How can Nigeria’s stock market price be measured in the face of financial/ economic recession?

(v) What macro- economic policy is suitable to move Nigeria’s stock market and the Nigerian’s economy at large from this malady?

1.5 Hypotheses of the Study

       The following hypotheses are formulated

Hypotheses I

H0: Nigeria’s stock price has not improved significantly since the beginning of economic recession.

H: Nigeria’s stock price has improved significantly since the beginning of economic recession.

Hypotheses II

H2: The fall in Nigerian currency has no significant relationship to the global economic recession in Nigeria.

H1: Fall in Nigerian currency has a significant relationship to the global economic recession in Nigeria.

Hypotheses III

H3: The falling prices of stock has no significant relationship to the global economic recession in Nigeria.

H1: The falling prices of stock has significant relationship to the global economic recession in Nigeria.

1.6 Significance of the Study

       This study is of great benefits as it encourages adequate funding of agricultural activities where the country has a comparative advantage and not probably relying on financial and oil sector as its major source of revues, especially in this period of global economic recession.

       Secondly, the research will serve as a reference materials to students who may intend to carry out similar study on the topic.

1.7 Scope and Limitations of the Study

       The study concentrates on the effect of economic recession on stock price of companies.

       Thus, the study is limited to one academic year, therefore, time posed great limitations. Also, limited fund to execute the research work as the researcher had to travel a long distance to get information relevant to the study. Other areas of constraints are the cost of typing, photocopying as a result of financial crisis and miscellaneous limitations.

1.8 Definitions of Operational Terms

Stock: Is a type of security that signifies ownership in a corporation and represents a claim on part of the corporations assets and earnings.

Capital Market: It’s a market in which individuals and institutions trade financial securities. Organizations/ institutions in the public and private sectors also often sell securities on the capital markets in order to raise funds. Thus, this type of market is composed of both the primary and secondary markets.

Economic Recession: The National Bureau of Economic Research (NBER) defines economic recession as a period of falling economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

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