INSTITUTIONAL QUALITY AND STOCK MARKET DEVELOPMENT IN NIGERIA – An Application of the ARDL Approach
This study was motivated by the growing concern on the impact of Institutional Quality on economic outcomes. The study focused specifically on the Nigerian Stock Market due to its critical role in the economy as a vehicle for efficient resource allocation. The Auto regressive Distributed Lag (ARDL) bounds testing procedure is employed using data from 1985 to 2012. The study used the ARDL model to ascertain the long-run impact of institutional quality on stock market development in Nigeria. The results from Empirical analysis of level of corruption, democratic accountability and bureaucratic quality exert significant impacts on stock market development as measured by market capitalization ratio. Also, Banking sector development and stock market
liquidity contribute significantly to stock market development. Moreover, a unidirectional causality runs from institutional quality to stock market development. The study therefore, recommends that the fight against corruption should be intensified while the market administrative and regulatory
qualities should be enhanced for a sustainable stock market development in Nigeria. Keywords: Institutional Quality, Stock market, development, Market capitalization ratio, corruption, democratic accountability, bureaucratic quality.
1.1 Background to the Study:
The role of institutional quality in sustainable development has received tremendous attention in recent time and it has been a central issue in development policies of many nations to orchestrate an insurmountable institution because of its critical position in the development of financial system and stock market in particular. Institution plays a pivotal role in promoting the enactment of rules and regulations, for proper surveillance of political, social and economic activities globally. Furthermore, viable institutions support macroeconomic stability and promote social cohesion, thus accelerating market efficiency and business development. It has been inferred that countries with efficient working institutions advances strong legal framework for the promotion of efficient mobilization and allocation of funds, thereby creating less risky business environment. Consequently, the absence of adequate regulatory framework and supervision could erode the investors’ confidence which will undermine the performance of the stock market (Law and Azman-Saini, 2008).
The deepening and broadening of the stock market in Nigeria presents an important concern to the policy makers (Manasseh et.al, 2014). This has brought to bear many institutional reforms such as the establishment of the investment and securities tribunal (IST) for investors protection, central securities clearing system (CSCS) for transparency, and prologue of other new practices in the market like; the introduction of automated trading system (ATS), Desk for phone-inservice, trade alert introduced by CSCS, a day transaction clearance (T+1) as against T + 14, introduction of the capital trade point by investment securities Act (ISA), introduction of market makers, and the establishment of Real Estate Investment Schemes (Manasseh et. al, 2012). Even though the market is erratic in its performance over time, the introduction of these practices and the newly established policy incorporating small and medium business enterprises in the activities of the market have brought some remarkable improvement in the performance of Nigeria stock market.
According to NSE (2013), the market performance shows that the number of securities listed on the stock exchange have grown greatly. For example, in 1961, the number of securities listed was 8, but have grown to 190 on average between 1971 and 2010. It was also noted that the market capitalization has soared from N6.6 billion in 1985 to about N12 trillion on averages between 1995 and 2010. However, at the end of 2013, the impressive performance of the market climbs to 47.2 percent return compared to 35.5 percent in 2012, and N13.226 trillion market capitalisation compared to N8.97 trillion recorded at the end of 2012 respectively. While NSE All Share Index which tracks the performance of the stock exchange blown to above 40,000 points compared to 28,078.81 points at the end of 2012, the portfolio of investors’ worth grew by N4.25 trillion.
Even in the presence of the recorded remarkable improvement in recent time, as shown in figure1 below, it is evident that the Nigeria stock market is the least in terms of market capitalisation compared to other emerging markets like Kuala Lumpur stock market of Malaysia; Singapore stock market and Johannesburg stock market of South Africa (World Bank,2012). Empirically, it has been opined that the poor performance of the Nigeria stock market is due to its weak institutional framework, political upheavals and corruption among others (Igbatayo, 2011). To this, Gries and Meierrieks (2010) argued that weak institution, characterised by poor legal framework, property right protection and high level of corruption is nonlinear in nature. They further argued that weak institution makes savings and investment less attractive particularly in the long run, thus discouraging additional demand for liquidity, financial services
like pooling of savings and monitoring of investment; and more sophisticated financial instruments. Consequently, this affects the performance of the Nigerian stock market development, emanating from lost incentive to boost investors’ confidence due to the market insecurity and fear of the tendency of loosing their fund.
Furthermore, in the effort to promote the institutional environment and to give life line to the Nigerian stock market, several reforms and measures to step up the level of confidence for the resuscitation of the market was adopted by the authorities. Amongst the measures are the establishment of anti-corruption agencies such as Independent corrupt practices and other related offences commission (ICPC) and Economic and Financial Crimes Commission (EFCC). While the ICPC is charged with the fight against corruption in all facets of the economy, the EFCC specifically focused on combating economic and financial crimes like money laundering, advance fee fraud, financial malpractices in banks and other financial institutions (Manasseh and Aneke; 2013). Also, the enactment of the Freedom of Information Act (FIA) is a step in the right direction to promote efficiency in information dissemination so as to mitigate the problem of information asymmetry in the stock market (Aiyede, Nil). Hence, in 2010, Asset Management Corporation of Nigeria (AMCON) was established, to also address the problem of nonperforming loans in the Nigerian banking industry, alongside Consumer and Financial Protection Division so as to provide a platform through which consumers can seek redress and to ensure transparency and accountability in the market. (Manasseh & Asogwa, 2013; and
In view of the above, considering the recent improvement in the institutional environment and substantial role of stock market development in mobilisation of savings, capital formation, service provision, as well as provision of investment avenue, with the goal of accelerating economic growth and development, it is therefore pertinent to assess the relationship between institutional quality and stock market development, which has over time been neglected in
previous studies in Nigerian. This is because evidence has a strong hold that institutional quality improves the enforcement of corruption control, which is often the source of insider-dealing and constitutes a serious impediment to the development of the market (Gries & Meierrieksy, (2010)). Such institutions reduce political risk, uncertainty in investment decision-making, lowering transaction and agency costs, and thus encourage consistent inflow of external finance into the market. This transforms to increase in the returns to shareholders, consolidation of Investors’ confidence and stock market development in general, alongside greater integration with world financial markets.
INSTITUTIONAL QUALITY AND STOCK MARKET DEVELOPMENT IN NIGERIA – An Application of the ARDL Approach
However, an efficient and well developed stock market is partly dependent on appropriate policies that would consolidate institutional framework for the creation of favorable business environment and investors protection. Therefore, the understanding of institutional factors that may significantly promote stock market development in Nigeria could be of great importance for proper policy formulation that will spur the growth of the market and economy in general.
1.2 Statement of Problem:
As the spine of financial market, stock market was purposely created to serve as one of the most important source for companies to raise money. This allows equities to be publicly traded to aid companies the avenue to raise additional financial capital for their expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange affords the investors gives them the ability to quickly and easily sell securities, which serves as an attractive feature of investing in stocks, compared to other less liquid investments (Cesari et.al, 2010 and Simkovic 2009). Empirically, it has been shown that the price of shares and other assets is an important part of the dynamics of every economic activity, and can influence the disposition or attitude of the many investors. An economy where the stock market is on the rise is considered to be the substances of business activities.
However, it is the primary indicator of a country’s economic strength and development (Singh, 2011). Thus, rising share prices boost business activities in the market, effecting the wealth of households and consumption, with its significant effect on percapita income, reduction in poverty and unemployment as well promote economic growth But the continuous and unimpressive performance of the market indicated by the NSE all share index in figure 2 below, which overtime has been as a result of fall in share prices of the listed companies have incapacitated the ability of the market in performing its functions. This has left many investors and market analysts in a state of chaos, with its ugly consequences on the reduction in investor’s confidence and the business activities in the market.