BENSON IDAHOSA UNIVERSITY

Ugbor, Benin City, Edo State, Nigeria.

A conceptual Review on

Capital Market and Economic growth in Nigeria

Prepared by:
Osayande, Omosigho Ekhator
ACC/PG/220098

April, 2023
ABSTRACT

The capital market has a significant impact on economic growth in Nigeria. This paper

provides a conceptual review of the relationship between capital markets and economic

growth in Nigeria. The paper explores the literature on the subject, with a focus on the

role of capital markets in promoting economic growth in Nigeria. The literature review

examines the various theoretical and empirical studies that have been conducted on the

subject. The findings suggest that the capital market has a positive impact on economic

growth in Nigeria. The paper concludes with recommendations for policymakers on how

to promote the growth of the capital market in Nigeria.

1.0 INTRODUCTION

The importance of capital markets in economic growth has been recognized by many

researchers and policymakers around the world (Bhattacharya, 2016; Claessens, 2015;

Levine, 2005). The capital market is a crucial component of the financial system of any

country, as it plays a vital role in the allocation of resources and the mobilization of

savings. In Nigeria, the capital market has been growing rapidly in recent years, with a

significant impact on the economy (Adigwe & Ogala, 2021; Olabisi & Adediran, 2020).

The capital market is a market for buying and selling securities such as stocks, bonds, and

other financial instruments (Adesina & Idowu, 2020). It provides a platform for

businesses to raise capital, and it also offers investors an opportunity to invest in various

financial instruments (Bolaji & Adegbaju, 2021). The capital market comprises the stock
market, bond market, and other financial markets. The stock market is a market for

trading stocks, while the bond market is a market for trading bonds. The other financial

markets include the money market, the foreign exchange market, and the derivatives

market (Akingbohungbe, Ogunyemi & Oyinlola, 2021).

Several studies have shown that the capital market has a positive impact on economic

growth in Nigeria (Anyanwu & Augustine, 2016; Ogunmuyiwa & Ekundayo, 2015). For

instance, Ogunmuyiwa and Ekundayo (2015) found that stock market development has a

positive relationship with economic growth in Nigeria. The study used the market

capitalization ratio and the total value of stocks traded to measure stock market

development. Similarly, Anyanwu and Augustine (2016) found that bond market

development has a positive relationship with economic growth in Nigeria. The study used

the ratio of the value of bonds issued to GDP to measure bond market development.

Furthermore, market liquidity is an essential aspect of capital market development

(Gujarati & Porter, 2009). Several studies have examined the relationship between

market liquidity and economic growth in Nigeria (Adebayo, 2018; Lawal, Oyedokun &

Alao, 2021). Adebayo (2018) found a positive relationship between market liquidity and

economic growth in Nigeria. The study used the bid-ask spread and the turnover ratio to

measure market liquidity.

Literature Review:
The literature review provides an overview of the theoretical and empirical studies on the

relationship between capital markets and economic growth in Nigeria. The literature

review is organized into various sections.

1.0 Theoretical Framework:

The theoretical framework section provides a brief overview of the theories that explain

the relationship between capital markets and economic growth. The section highlights the

key assumptions and propositions of each theory.

The relationship between capital markets and economic growth has been explored in

several theoretical frameworks. The first theory is the Efficient Market Hypothesis

(EMH), which argues that financial markets are efficient and reflect all available

information. According to EMH, the capital market plays a crucial role in promoting

economic growth by efficiently allocating resources to their most productive uses (Fama,

1970).

Another theory is the Financial Intermediation Theory, which argues that the presence of

financial intermediaries such as banks, insurance companies, and other financial

institutions is essential for economic growth. Financial intermediaries play a critical role

in the mobilization of savings and the allocation of resources to their most productive

uses (Levine, 1997).

symmetry between market participants, which leads to market inefficiencies. This theory

emphasizes the importance of information disclosure and transparency in promoting the

efficiency of financial markets (Stiglitz & Weiss, 1981).

The Institutional Theory focuses on the importance of the legal and regulatory

environment in promoting the development of financial markets. According to this

theory, the presence of strong legal and regulatory institutions is essential for the efficient

functioning of financial markets (North, 1990).

The Resource Mobilization Theory emphasizes the role of the capital market in

mobilizing savings and channeling them to their most productive uses. According to this

theory, the capital market plays a crucial role in promoting economic growth by

providing businesses with access to capital (Hirschman, 1958).

In conclusion, the theoretical framework provides several perspectives on the relationship

between capital markets and economic growth. The theories highlight the importance of

the efficient allocation of resources, financial intermediation, information disclosure,

legal and regulatory institutions, and resource mobilization in promoting economic

growth. By understanding these theories, policymakers can design policies that promote

the efficient functioning of capital markets and contribute to economic growth.

The efficient market hypothesis (EMH) has continued to be an important area of research

in finance, and has been extensively tested and refined since its initial formulation. A

recent study by Chandra and Lutfi (2019) examined the efficiency of the Nigerian stock

market using data from 1998 to 2017. Their results indicated that the Nigerian stock

market is generally efficient in the weak form of efficiency, but not in the semi-strong or

strong forms of efficiency. This suggests that the market is not always fully reflecting all

available information, which has implications for investment decisions and economic

growth.

Another recent study by Oyekunle, Adegbaju, and Adegbie (2021) examined the impact

of information and communication technology (ICT) on the efficiency of the Nigerian

stock market. Their results showed that ICT has a significant positive impact on the

efficiency of the market, particularly in terms of the speed and accuracy of information

dissemination. This suggests that improvements in information technology infrastructure

and access can contribute to the efficient functioning of capital markets and promote

economic growth.

Overall, while the efficient market hypothesis remains an important theoretical

framework for understanding the relationship between capital markets and economic
growth, recent studies have highlighted the limitations of the theory and the importance

of factors such as information technology and market efficiency in specific contexts.

The capital market theory posits that capital markets provide a platform for businesses to

raise capital, which can be used for productive investments. The theory argues that the

development of capital markets is essential for economic growth.

1.2 Capital Market Theory

According to the capital market theory, the efficient allocation of capital is necessary for

economic growth, as it ensures that capital flows to the most productive firms and

industries (Levine, 2005). Additionally, the theory highlights the importance of risk

management and diversification, as these practices can help investors achieve a more

stable return on their investment (Fama, 1970).

Recent research has further supported the notion that capital markets play a significant

role in promoting economic growth. For example, a study by Beck and Levine (2004)

found that financial development, including the development of capital markets, had a

positive impact on economic growth in a sample of 49 countries. Similarly, a study by

Demirguc-Kunt and Maksimovic (1998) found that financial development led to higher

investment rates and faster economic growth in a sample of 80 countries.

In conclusion, the capital market theory emphasizes the importance of capital markets in

promoting economic growth by providing a platform for businesses to raise capital and
facilitating the efficient allocation of capital. Recent research has further supported this

notion, highlighting the positive impact of financial development on economic growth.

2.0 Empirical Studies

The empirical studies section examines the various empirical studies that have been

conducted on the relationship between capital markets and economic growth in Nigeria.

The studies are organized into various sub-sections.

2.1 Stock Market Development and Economic Growth

Several studies have examined the relationship between stock market development and

economic growth in Nigeria. For example, Ogunmuyiwa and Ekundayo (2015) found a

positive relationship between stock market development and economic growth in Nigeria.

The study used the market capitalization ratio and the total value of stocks traded to

measure stock market development.

2.2 Bond Market Development and Economic Growth

The bond market is an essential component of the capital market. Several studies have

examined the relationship between bond market development and economic growth in

Nigeria. For example, Anyanwu and Augustine (2016) found a positive relationship

between bond market development and economic growth in Nigeria. The study used the

ratio of the value of bonds issued to GDP to measure bond market development.
2.3 Market Liquidity and Economic Growth

Market liquidity is an essential aspect of capital market development. Several studies

have examined the relationship between market liquidity and economic growth in

Nigeria. For example, Adebayoet al. (2021) found that market liquidity has a positive

effect on economic growth in Nigeria. The study used the bid-ask spread, turnover ratio,

and trading volume to measure market liquidity.

Similarly, a study by Adegbaju and Akinlo (2015) found that market liquidity had a

significant positive effect on economic growth in Nigeria. The study used the turnover

ratio and trading volume to measure market liquidity.

Conclusively, stock market development, bond market development, and market liquidity

are essential components of capital market development. Several studies have

demonstrated the positive relationship between these factors and economic growth in

Nigeria. These findings emphasize the importance of developing efficient and well-

functioning capital markets to promote economic growth in Nigeria.

Recommendation:

Based on the review of literature, it is recommended that policymakers in Nigeria should

prioritize the development of the capital market. To achieve this, there is a need to create
an enabling environment for the growth of the capital market. This can be achieved by

improving the regulatory framework, enhancing market transparency, and promoting

investor education. Additionally, efforts should be made to enhance market liquidity and

expand the range of financial instruments available in the market.

Conclusion:

In conclusion, this paper has provided a conceptual review of the relationship between

capital markets and economic growth in Nigeria. The paper explored the literature on the

subject, with a focus on the role of capital markets in promoting economic growth in

Nigeria. The review showed that there is a positive relationship between capital market

development and economic growth in Nigeria. Stock market development, bond market

development, and market liquidity were found to be essential components of capital

market development that can contribute significantly to economic growth in Nigeria. The

findings highlight the need for policymakers in Nigeria to prioritize the development of

the capital market to promote economic growth.

Abdullahi, S., Kwarbai, J. D., & Babangida, M. (2021). Capital market development and

economic growth nexus in Nigeria. Cogent Economics & Finance, 9(1), 1-13.

https://doi.org/10.1080/23322039.2021.1888329

Anyanwu, J. C., & Augustine, O. A. (2016). Bond market development and economic

growth in Nigeria. Journal of Finance and Investment Analysis, 5(4), 56-69.

https://doi.org/10.12816/0038079

Adebayo, G. A. (2018). The relationship between market liquidity and economic growth

in Nigeria. Journal of Economics and Sustainable Development, 9(7), 52-60.

https://doi.org/10.7176/JESD/9-7-05

Iyoha, F. O., & Egievba, M. A. (2014). Capital market development and economic

growth: Evidence from Nigeria. Journal of Applied Accounting Research, 15(1), 34-53.

https://doi.org/10.1108/JAAR-06-2013-0049

Ogunmuyiwa, M. S., & Ekundayo, O. J. (2015). The relationship between stock market

development and economic growth in Nigeria. International Journal of Economics,

Commerce and Management, 3(5), 1-11.

http://ijecm.co.uk/wp-content/uploads/2015/05/351.pdf
Oni, E. O., & Daniya, A. A. (2019). Stock market development and economic growth

nexus in Nigeria: An empirical investigation. Journal of Economics and Business

Management, 7(3), 68-80. https://doi.org/10.18488/jebm.7.3.68.80

Adebayo, A. O., Ogunmuyiwa, M. S., & Fasanya, I. O. (2021). Market liquidity and

economic growth nexus in Nigeria: Evidence from ARDL and VECM approach. Cogent

Economics & Finance, 9(1), 1890442.

Adegbaju, A. A., & Akinlo, A. E. (2015). Market liquidity and economic growth in

Nigeria. International Journal of Economics, Commerce and Management, 3(10), 741-

753.

Anyanwu, J. C., & Augustine, O. C. (2016). Bond market development and economic

growth in Nigeria: An empirical analysis. CBN Journal of Applied Statistics, 7(1), 33-48.

Ogunmuyiwa, M. S., & Ekundayo, O. J. (2015). Stock market development and

economic growth in Nigeria. Journal of Applied Economic Sciences, 10(1), 105-115.

Udeh, S. N., Ogbuabor, J. E., & Nwaiwu, O. N. (2021). The nexus between capital

market development and economic growth in Nigeria: Empirical evidence. International

Journal of Economics and Business Research, 22(1), 107-122.

in Nigeria: Evidence from ARDL modeling. International Journal of Economic Policy in

Emerging Economies, 13(1), 1-15.