




































Economy 
ISSN: 2313-8181 
Vol. 3, No. 1, 31-39, 2016 
www.asianonlinejournals.com/index.php/Economy 
 

  

 

 

 

 

31 

 

The Perceived Relations between Development Reforms, 

Stock Market Performance and Economic Growth in 

Nigeria: 1984-2014 
 

Okoroafor O.K David1
 

Yelwa Mohammed2 

1,2
Department of Economics, University of Abuja, 

Federal Capital Territory, Abuja, Nigeria 
( Corresponding Author) 

 

Abstract 
Economic indicators and the stock market performance in Nigeria have been one area of wide debate 

among the academia as well as the policy makers and implementers. The Nigerian economy and in 

particular the capital market have witnessed several developmental reforms in the past three decades. 

Many believe the reforms have rather had negative impact, while others believe otherwise. In view of the 

above, this recent study was embarked upon to ascertain empirically the relations between the reforms, 

stock market performance and economic growth over the periods of 1984 to 2014. The study employed 

the Generalized Method of Moment (GMM) among other technics for the analysis. Our result revealed 

that the reforms over the period of the study had positive significant impact on the stock market 

performance, and the stock market also had significant and positive effects on economic growth in 

Nigeria. The study concluded on the need to intensify reforms in the areas of market security, 

sensitization and widening the market participation zones to incorporate rural dwellers, as well as small 

and micro firms.   

 
Keywords: Relations, Development, Reform, Performance, Growth, Market, Nigeria, Economy, Indicators. 

 

Contents 
1. Introduction ......................................................................................................................................................................... 32 

2. Literature Review ................................................................................................................................................................ 32 

3. Analytical Methodology ....................................................................................................................................................... 35 

4. Empirical Analysis ............................................................................................................................................................... 36 

5. Summary and Conclusion ................................................................................................................................................... 38 

References ................................................................................................................................................................................ 38 

 
 

Citation | Okoroafor O.K David; Yelwa Mohammed (2016). The Perceived Relations between Development Reforms, Stock Market Performance and 

Economic Growth in Nigeria: 1984-2014? Economy, 3(1): 31-39. 

DOI: 10.20448/journal.502/2016.3.1/502.1.31.39       

ISSN(E) : 2313-8181   

ISSN(P) : 2518-0118 

Licensed:  

Contribution/Acknowledgement: 
This work is licensed under a Creative Commons Attribution 3.0 License  

All authors contributed to the conception and design of the study. 

Funding: This study received no specific financial support. 

Competing Interests: The author declares that there are no conflicts of interests regarding the publication of this paper. 

Transparency: The author confirms that the manuscript is an honest, accurate, and transparent account of the study was reported; that no 

vital features of the study have been omitted; and that any discrepancies from the study as planned have been explained. 

Ethical: 

History: 

This study follows all ethical practices during writing.   

Received: 12 January 2016/ Revised: 16 February 2016/ Accepted: 20 February 2016/ Published: 24 February 2016 

Publisher: Asian Online Journal Publishing Group 

 
 

 

 
 

 

 

 

 

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Economy, 2016, 3(1): 31-39 

 

 

 

 

32 

 

1. Introduction 
The importance of investment finance in the performance of any nation economy cannot be overemphasized. It is 

as important as blood is to the circulatory system of human body. Whenever there is lack of blood or inadequacy of 

blood in the human system, death becomes inevitable; so is finance to any nation‟s economy. The capital market is a 

major conduct that provides finance, particularly long term investment finance to the economy. And because of the 

importance attached to finance, inter-alia the capital market, many government are now sensitive to the happenings 

in their capital market, and engages in periodic reforms to improve the soundness, stability and the overall efficiency 

of the market at all time.  

The Nigerian government in particular has put in place various reforms measures to regulate the capital market 

and make it more relevant in the achievement of the nation overall macroeconomic objectives. The capital market 

thrives in an environment where market forces are allowed to play their roles of ensuring efficiency in the allocation 

of financial resources which ensures sustainable economic growth and development through the formation of fixed 

capital. In addition, the existence of market intermediaries, well developed accounting, auditing and financial 

disclosure standard together with enforced legal and regulatory framework for investors protection are absolutely 

critical for the effective contribution of capital market to economic growth (Audu, 2015).  

Reforms have been the widely acclaimed measures to stimulate capital market development. De La Torre and 

Schmukler (2007) have identified four category of reform: (1) reforming the enabling environment for capital market 

in the area of strengthening macroeconomic stability and enforcement of property rights; (2) reforming to enhance 

the efficiency of market discipline in the entire financial system through capital account liberalization; (3) reforming 

the associated and supporting institutions of capital market operation such as pension reforms and privatization 

programme; and (4) specific reforms for the development of regulatory and supervisory framework and improvement 

in securities clearance and settlement system.  

Nigeria had measured significantly virtually in all the four categories of reforms mentioned. For instance, 

between 1972 and 1977, it had the Nigeria enterprises promotion degree reform that indigenized most foreign 

enterprises which allowed Nigerians have some equity ownership of these enterprises. Most of these enterprises were 

quoted at the stock exchange. Again in 1986, the government introduced the Structural Adjustment Programme 

(SAP) as an economic policy reform, targeted to reform the financial sector, deregulate the foreign exchange and 

interest rate to promote domestic savings, and improve domestic and foreign investment flows. There was also in 

1988, the privatization and commercialization of public enterprises with the aim of creating favourable investment 

climate for both domestic and foreign investors and enhance private sector led growth of the economy. All these 

were made with the intent to promote capital market development.  

Furthermore, in 1995 investment promotion and foreign exchange decree were promulgated in order to remove 

the hiccups to foreign investors‟ participation in the Nigerian capital market. With this, investors in the capital 

market can repatriate dividends on investment, transfer foreign loans provided for investment in the country, sale or 

liquidate enterprise or any interest attributable to investment. Also in 1999, there was Investment and Securities Act 

enactment that enables Security and Exchange Commission (SEC) to pursue investor protection and capital market 

development by regulating investments and securities business in Nigeria  

Other giant strides in the capital market reforms to enhanced stock market development are the introduction of 

electronic business (e-business) with automatic access to Central Securities Clearing System (CSCS) in 1999. There 

was also the introduction of trade alert information system that alerts stock holders of any transaction in their stock 

within 24 hours. Again in 2001, the Nigerian Stock Exchange (NSE) introduced organizational structural reform of 

its self to boost performance.  

Another remarkable reform that has significant impact to the capital market development was the Pension reform 

Act of 2004 and the Banking Sector recapitalization reform of 2005. The Pension Act in particular stipulated 

investment of Pension fund in bonds, bills and other securities guaranteed by the federal government and Central 

Bank of Nigeria. The commercial Banking Sector recapitalization reform itself opened way for many banks to access 

the capital market to raise needed developmental funds.  

Nigeria like other developing and developed countries of the world has embarked on capital market reform as a 

veritable tool to enhance the performance of the economy. She has followed after other nations that reformed their 

capital market such as:  China in 1979, Turkey in 1980, Ghana in 1983, India in 1992, Cuba in 1995 and Pakistan in 

1999. Many of the reforms from these countries have yielded attendant results. However, for Nigeria, the ensuing 

economic predicaments manifest in forms of debt burden, sluggish savings mobilization and slow growth rate, 

particularly in the financial sectors have called to question the effectiveness of the reforms over the years. More so, 

the reforms have not been limited to the capital market but have included monetary and fiscal policies reforms and 

other sectorial reforms.  

In view of numerous reforms pursued, several questions have been raised by investors, practitioners, academics 

and policy makers as to how effective capital market reforms are to the advancement of the economy? Is capital 

market development reforms positively or negatively related to stock market development and economic growth in 

Nigeria? Empirically, is the impact of reforms on stock market development and the Nigerian economy significant? 

This study is poised to provide needed answers to the questions raised above.  

In lieu of the issues raised, the remaining part of this study is structured into four sections. The second section 

will provide the literature review. The third section considers the methodology. While the fourth and fifth sections 

respectively will give empirical analysis of data and summary of the study.                           

                                                            

2. Literature Review  
The importance of reviewing literature in a research work is enormous. Basically, it provides knowledge of what 

previous authors or researcher have done in the related field of study; the theories on which previous work was based 



Economy, 2016, 3(1): 31-39 

 

 

 

 

33 

 

on and the empirical findings from such works. In this guise, we highlight the conceptual, theoretical and empirical 

views of authors in this field.  

 

2.1. Conceptual Review  
Conceptually, capital market is seen as an institution that plays the role of channeling resources, promoting 

reforms to modernize the financial sector and link deficit sectors to the surplus sectors. It is also seen as veritable tool 

in the mobilization and allocation of savings to critical growth sectors of the economy (Alile, 1996). Capital market 

is an institution that offers variety of financial instruments with attractive yields, liquidity and risk characteristics that 

encourages savings in financial form essential for government and other institutions in need of long term funds 

(Nwankwo, 1999). In a related conceptual explanation, Ekundayo (2006) see the capital market as a means through 

which a nation attains sustainable economic growth and development through local and foreign investment. To 

Osaze (2000) capital market is the major driver of any economy to growth and development, as it is vital for long 

term capital formation, savings mobilization and channeling of same to profitable investments.       

The capital market provides the necessary lubricant that keeps turning the wheel of the economy. In its allocative 

function, the market affects liquidity, acquisition of information about firms, risk diversification, savings 

mobilization and cooperate control (Anyanwu, 1998).           

Furthermore, the functioning of the capital market alters the rate of economic growth (Ekuakun, 2005). To 

Okereke-Onyiuke (2000) cheap sources of fund from the capital market remain a critical element in sustainable 

development of the economy. She further enumerated the advantage of capital market financing to include: no short 

repayment period as funds are held for medium and long term period; funds to state and local government are held 

without pressures and there is ample time to repay loans. In the reasoning of Al-Faki (2006) capital market is a 

network of specialized financial institutions, series of mechanisms, processes and infrastructure that facilitates the 

bringing together of suppliers and users of medium to long term capital for investment in socio-economic 

developmental projects. To Sule and Momoh (2009) the capital market has two faces (the primary and secondary 

market); concerning Nigeria, they maintained that activities of the secondary market have impacted more on per 

capital income by assisting to grow stock market earnings through wealth than the primary market. 

        

2.2. Theoretical Review 
There are large volume of theoretical literature which suggests that the functioning of stock markets affects 

liquidity, information acquisition, risk diversification, savings mobilization, corporate control and economic growth. 

There are also debates on whether stock market development has positive or negative effect on economic growth. As 

revealed by Demirgue-Kunt and Levine (1996); Bencivenga et al. (1996) and Levine and Zervos (1996) stock 

markets may affect economic activity through the creation of liquidity. A number of profitable investments require 

long term capital, but investors are often reluctant to relinquish control of their savings for long period. It is the stock 

market that make investment less risky and more attractive as it allows savers to acquire equity which it can sell 

quickly and cheaply whenever they have need to access their savings. Companies at same time enjoy permanent 

access to raise capital through equity issue. This action facilitates more long term profitable investment, improves 

capital allocation and enhanced prospect for long term economic growth.  

There are other alternative views about the effect of liquidity on long term economic growth. Three channels are 

identified through which increase in liquidity can affect economic growth. First, it is reported that by increasing 

return-to investment, greater stock market liquidity might reduce saving rates through income and substitution 

effects. Secondly, that stock market liquidity might adversely affect corporate governance. This is because liquid 

stock market makes it easy for dissatisfied investors to sell-off investments. This action invariably weakens investor 

commitment and incentives to exert corporate control by overseeing managers and indirectly hurts economic growth 

(Demirgue-Kunt and Levine, 1996). Thirdly greater stock market liquidity reduces uncertainty associated with 

investment and savings. And less uncertainty makes an investment more attractive to risk averse agents.  

The stock market also affects the incentives for acquisition of information about a firm by investors (Holmstrom 

and Tirole, 1993; Levine and Zervos, 1996). In a larger and liquid stock market investors got information easier to 

trade at posted prices.  This enables an investor to make money before the information become widely available and 

price changes. The ability to profit from information stimulates investors to research and monitor firms. The end 

result of this is improved resources allocation that spurs economic growth. The stock market development may also 

influence saving mobilization that set feasible investment projects: Projects that require large capital injection are 

made ease through resources mobilization in the stock market with concomitant economic efficiency and accelerated 

long run economic growth.  

Stock market also may impact on economic growth through changes in incentives for corporate control. Efficient 

stock market makes it easier to tie manager compensation to stock performance (Jensen and Stiglitz, 1990). It helps 

to align the interests of managers and owners. This induces managers to maximize a firm‟s equity price (Scharfstein, 

1988). A well-functioning stock market promotes efficient resource allocation and economic growth by providing a 

boost to domestic savings and increasing the quantity and quality of investment. Stock market can encourage 

economic growth by providing the avenue for companies to raise capital at lower cost. Companies in developed stock 

market are less dependent on bank financing which can reduce the risk of a credit crunch.  

Critics of the stock market have equally argued that operation of the pricing and take over mechanism in stock 

markets lead to short termism and lower rates of long term investment particularly in firm specific human capital. It 

also generates perverse incentive, rewarding managers for their success in financial engineering rather than creating 

new wealth through organic growth (Singh, 1997). Further criticism was that stock market liquidity may negatively 

influence corporate governance because very liquid stock market may encourage investor myopia. This may prompt 

investors to sell their shares, weakening investors‟ commitment and incentive to exert corporate control (Bhide, 

1993). It is argued that these problems are further magnified in emerging market countries with weaker regulatory 



Economy, 2016, 3(1): 31-39 

 

 

 

 

34 

 

institutions and greater macroeconomic volatility. These serious limitations of the stock market have led many 

analysts to question the importance of the system in promoting economic growth in emerging markets (Audu, 2015).           

There is further argument among researchers and economists as to the relevance of the financial system in 

economic growth and development. Many believe that finance plays an inconsequential role in economic growth and 

development of nations Lucas (1988) and Stern (1989). However, an opposing view among researchers and 

economists held that financial system of a country plays an important role in economic growth (Ojo, 1984). It is also 

theorized that capital market development may influence economic growth through risk diversification (Devereaux 

and Smith, 1994). Risk diversification is discovered to influence growth through the shifting of investments into high 

return projects. And projects with high expected return tend to be comparatively riskier. Thus better risk 

diversification through internationally integrated stock markets fosters investment in projects with very high returns; 

this invariably influences growth positively.  
                                                              

2.3. Empirical Review     
There are volumes of empirical literatures on how the functioning of stock market affects liquidity, acquisition of 

information about a firm, risk diversification, saving mobilization, corporate control and rate of economic growth. 

However debate exists over the signs of this effect. Some of the studies suggested that stock market development has 

positive effect on growth, while others predict a negative relationship between stock market development and 

economic growth Demirgue-Kunt and Levine (1996); Levine and Zervos (1996); Nyong (1996); Anyanwu (1998); 

Adam and Sanni (2005); Ezeoha et al. (2009); Ohiomu and Godfrey (2011); Kolapo and Daramola (2012) and 

Okoroafor (2014).  

For instance, Levine and Zervos (1996) examined whether there was a strong empirical relationship between 

stock market development and long run economic growth. They found a strong correlation between stock market 

development and long run economic growth. Demirgue-Kunt and Levine (1996) studied stock market development 

and economic growth of 44 countries over the period of 1986 to 1993. They found that different measures of stock 

exchange size are strongly correlated to other indicators such as level of financial banking and non-banking 

institution as well as insurance and pension funds. They concluded that countries with well-developed stock markets 

tend to also have well developed financial intermediaries.  

Furthermore, Levine and Zervos (1998) using pooled cross-country data of 47 countries from 1976 to 1993 

evaluated whether stock market liquidity is related to growth, capital accumulation and productivity. They towed the 

line of Demirgue-Kunt and Levine (1996) by including measures such as stock market size, liquidity, integration 

with world market and index of stock development. The rate of Gross Domestic Product (GDP) per capital was 

regressed on a variety of variables designed to control for political instability, investment in human capital and 

macroeconomic conditions and index of stock market development. They found empirically that the measures of 

stock market liquidity were strongly related to growth, capital accumulation and productivity; while stock market 

size does not seem to correlate with economic growth.  

Meanwhile, Harris (1997) did not find supportive evidence that stock markets activity affects the level of 

economic growth. The work by Atje and Jovanovic (1998) show that stock market development is strongly 

correlated with growth rates of real GDP per capital. More importantly they found that stock market liquidity 

predicts the future growth rate of the economy. Also, Rousseau and Paul (1998) examined and found that stock 

market-growth nexus exhibited positive causal relationship between stock market development and economic 

activity.  

Mohtadi and Agarwal (2001) argue that financial sector development facilitates capital market development, and 

in turn raises real growth of the economy. Pedro and Erwan (2004) asserted that financial market development raises 

output by increasing the capital used in production.  

Bekaert et al. (2005) indicated that capital market development has contributed to the economic growth of Egypt. 

For Belgium, Nieuwerbugh et al. (2005) investigated the long run relationship between growth and financial market 

development. The authors used a new set of stock market indicators to argue that financial market development 

substantially affects economic growth, especially in the period of 1973 to 1993. Liu and Hsu (2006) reported a 

positive impact on economic growth of stock market development in Taiwan, Korea and Japan. Yartey (2008) in his 

study “The determinants of stock market development in emerging economies: is South Africa different”, examined 

the institutional and macroeconomic determinants of stock market development using a panel data of 42 emerging 

economies for the period of 1990 to 2004. His result indicates that macroeconomic factors such as income level, 

gross domestic investment, banking sector development, private capital flows, and stock market liquidity are 

important determinants of stock market in emerging markets. The result also indicated that political risk, law and 

order, and bureaucratic quality are important determinants of stock market development because they enhance the 

viability of external finance.  

In Nigeria, several authors have equally examined stock market development and economic growth relationship. 

For instance, Nyong (1996) looked at the relationship between long run economic growth in Nigeria and aggregate 

index of capital market development. The study employed time series data from 1970 to 1994. It was found that 

capital market development is negatively and significantly correlated with long-run economic growth in Nigeria. 

Anyanwu (1998) also applied aggregate index of capital market development to determine its long run relationship 

with economic growth in Nigeria. The result indicated that Nigerian stock market development positively and 

robustly associates with long run economic growth in Nigeria. Also Osinubi and Amaghionyeodiwe (2003) 

examined the relationship between Nigeria stock market and economic growth during the period of 1980-2000; using 

ordinary least square (OLS), their result showed positive relationship between the stock market and economic growth 

and they suggested the pursuit of polices that geared towards the development of the stock market.  

Also, Adam and Sanni (2005) investigated the role of stock market on Nigeria growth, using granger causality 

test and regression analysis. Their result showed a one-way causality between GDP growth and market 



Economy, 2016, 3(1): 31-39 

 

 

 

 

35 

 

capitalization, and market turnover. They also observed a positive and significant relationship between turnover ratio 

and GDP growth. They concluded that government should encourage the development of the capital market since it 

has a positive effect on economic growth. Obamiro (2005) investigated relations between stock market and economic 

growth in Nigeria. The result showed significant positive effect of stock market on economic growth. Ewah et al. 

(2009) studied capital market efficiency on economic growth in Nigeria using time series data on market 

capitalization, money supply, interest rate, total market capitalization and government development stock, 1961-

2004. They applied multiple regressions and ordinary least squares estimation techniques. The result showed capital 

market in Nigeria has the potential to induce growth. However, that it has not contributed meaningfully to economic 

growth in Nigeria because of low market capitalization, low absorptive capacity, illiquidity, misappropriation of 

funds among others.  

In Addition, Ezeoha et al. (2009) examined the nature of relationship between stock market development and 

level of investment (domestic private investment and foreign private investment) flows in Nigeria. The author 

discovered that stock market development promotes domestic private investment flow. The result equally showed 

that stock market development has not been able to encourage the flow of foreign private investment in Nigeria. Abu 

(2009) examined if stock market development in Nigeria raises economic growth. He employed error correction 

approach, and the result indicated that stock market development (market capitalization-GDP ratio) increases 

economic growth.  Pat and James (2010) contended that the capital market indices have not impacted significantly on 

the GDP. From Kolapo and Daramola (2012) study on impact of capital market on economic growth, the result 

reveals that the activities in the capital market tend to impact positively on the economy. Again Idowu and 

Babatunde (2012) studied the effect of financial reforms on capital market development in Nigeria. They applied the 

Chow-breaking point test, and result reveals that financial reform of 1995 impacted significantly on the capital 

market development in Nigeria. Also the study by Okoroafor (2014) on the efficiency of the Nigerian capital market 

and the stock price volatility, confirmed that stock  prices in Nigerian stock market is highly volatile and in addition 

with public holidays influences negatively the capital market performance. Again Audu (2015) reported that the 

instituted capital market reforms in Nigeria impacted positively on capital market development and economic growth 

in Nigeria.             

                                  

3. Analytical Methodology  
The method adopted in arriving at solution to research question is very vital to empirical studies. Previous 

empirical studies as reviewed have suggested a connection between capital market development and economic 

growth. Most of the relationship posted is a causal one, with no unified model where impact of capital market 

reforms on stock market development and economic growth are examined simultaneously. This being the fact, the 

question “do capital market reforms have effect on the development of stock market and economic growth in Nigeria 

remains unanswered. To provide the required answers to the stated problem of this study, we employed generalized 

method of moment (GMM) technique. 

 

3.1. The Model Specification 
The study is focused to examine the roles of lagged values of the following: market capitalization, index of stock 

prices, volume traded, turn-over ratios, foreign portfolio investment, real gross domestic product, money supply and 

openness of the economy on market capitalization. It is also aimed at establishing the impacts of capital market 

developmental indices on the economic growth. Structurally, the equations are given as: 

MCAP = f( MCAPt-i ,INDXt-i , VTRt-i , TVRt-i, FPIt-i, RGDPt-i. M2t-i,, OPNt-i )…………….…3.1.1  

Where: 

MCAP= Stock market capitalization. 

INDX = Index of stock prices. 

VTR = Volume traded 

TVR = Turn over ratios. 

FPI = Foreign portfolio Investment. 

RGDP = Real Gross Domestic Product. 

M2 = Money supply 

OPN = Openness of the economy 

The explicit form of equation 3.1.1 is represented as: 

MCAP = ᵦ0 + ᵦ1MCAPt-i + ᵦ2INDXt-i,+ ᵦ3 VTRt-i + ᵦ4TVRt-i  + ᵦ5FPIt-i + ᵦ6RGDPt-i  + ᵦ7M2t-i + ᵦ8OPNt-i  + 

μt…………………………………………………………………………………………………3.1.2 

On the other hand the impact of capital market development on economic growth is stated as: 

RGDP = f( RGDPt-i , MCAPt-i ,VTRt-i , TVRt-i, OPNt-i )………………………………………3.1.3 

Where: 

RGDP = Real Gross Domestic Product. 

 MCAP= Stock market capitalization. 

VTR = Volume traded 

TVR = Turn over ratios. 

OPN = Openness of the Economy. 

Explicitly, the equation 3.1.3 becomes: 

RGDP = λ0 +  λ1 RGDPt-i + λ2 MCAPt-i  + λ3VTRt-i  + λ4 TVRt-i + λ6 OPNt-i  +  εt  ……...…3.1.4 

 

 

 



Economy, 2016, 3(1): 31-39 

 

 

 

 

36 

 

3.2. Validity of the Method 
The use of GMM is informed by the fact that the two relationships to be studied are characterized by joint 

endogeneity of some variables involved in the study. Besides in a system of simultaneous equation, the issue of 

identification is upheld. In the case of over-identification, the method of indirect least square is not appropriate. 

Other methods such as Two Stage Least Squares (TSLS), Three Stage Least Squares (3SLS), Seemingly Unrelated 

Regression (SUR), General Least Squares (GLS) and Generalized Method of Moments (GMM) are favoured. 

However, if the rank condition is satisfied, the most appropriate of these techniques to apply is the GMM according 

to Gujarati (2005) and Yartey (2008).    

From our simultaneous equation system, some of the explanatory variables in the model are either 

simultaneously determined with the dependent variables or have a two way causal relationship with it. In the 

presence of correlation between the right hand side variable and that of the left hand side, estimation method such as 

OLS will not be consistent because assumption of strict exogeneity of the explanatory variables would be violated. 

Again the orthogonalised condition between error term and regressors are not likely to meet for either GLS or SUR 

estimator to produce consistent estimation. It is still possible to achieve the orthogonal condition between the error 

term and the regressors through appropriate differencing of data. However because equations contains endogenous 

regressors as well as effects of lagged endogenous variables, the error term in the differenced equation is correlated 

with the lagged dependent variable through contemporaneous error term. Therefore, neither application of GLS or 

SUR estimator will produce consistent estimates under this condition except the use of GMM. GMM estimator is an 

instrumental variable estimator that uses lagged values of all endogenous regressors as well as lagged and current 

values of all strictly exogenous regressors as instruments. The equations can be estimated using the levels or the first 

differences of the variables. The GMM is chosen because of the optimal properties that its parameters estimates 

possess. Its computational procedure is fairly simple, and it has limited data requirement. It is intuitively appealing. 

Above all, the GMM technique has over time produced fairly satisfactory results in a range of economic relationship 

it has been applied, Yartey (2008).                       
 

3.3. The Technique of Evaluation 
The equations 3.1.2 and 3.1.4 will be subjected further to dynamic estimation using the lag structure of the 

variables. There will also be determination of the existence of substantial co-movement among the time series 

variables. Furthermore the data would be tested for unit root by applying the Augmented Dickey Fuller (ADF) tool. 

Also the Wald Coefficient test will equally be applied to the estimated equation to perform hypothesis tests on the 

coefficients of the model after using GMM. The Wald test examines whether the positive and negative coefficients in 

the GMM estimate are significantly different from zero (that is, whether they are symmetric or asymmetric). The 

coefficient of determination and its adjusted values with Durbin Watson statistics shall equally be applied in the 

evaluation. 

 

3.4. Sources of Data 
The data for this study covering the period of 1984-2014 is a secondary data secured from Central Bank of 

Nigeria Statistical Bulletin, various issues; Nigerian Bureau of statistics (NBS) and the Nigerian stock Exchange 

(NSE) fact books. 

 

4. Empirical Analysis 
In this section, we presented an analysis of the data used and the interpretation of the result generated from the 

data. The data for the study is presented in the appendix and it covers the period of 1984-2014. Starting from the 

model identification, the two equations in our study were discovered to be over-identified.  

 
Table-4.0.1. Unit Root Test. 

 5% LOS  

Critical values 

Augmented Dickey-Fuller Statistics. 

Variable(s) Level 1
st
 Difference 2

nd
 Difference Decision 

MCAP 5.662 -3.612 - - I(0) 

VTR 5.621 -3.622 - - I(0) 

TVR -4.735 - 3.581 - I(1) 

FPI -9.653 -3.587 - - I(0) 

RGDP -6.060 - -3.581 - I(1) 

M2 -4.883 - -3.574 - I(1) 

OPN -3.632 -3.568 - - I(0) 

INDX -5.661 - -3.574 - I(1) 
                         Sources: Authors Computation 

 

We therefore proceeded to apply the GMM techniques as pointed to earlier. Meanwhile the Augmented Dickey-

Fuller tests of the time series were done to ascertain the time series property of the data. The result of the ADF test is 

presented and analyzed below. 
The result of the unit root test as presented above indicates that MCAP, VTR, FPI and OPN were stationary at 

level. While TVR, RGDP, and INDX were integrated at order one, each at 5 percent level of significance. It is 

judged safe to continue with the time series data estimates of our econometrics specifications. 

 

 

 



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4.1. Presentation of Results of GMM 
 

 

Table-4.1.1. Generalized Method of Moments (GMM) Result. 

Explanatory 

Variables 

Equation 3.1.2 Coefficients 

(MCAP Is Dependent Variable) 

Explanatory 

Variables 

Equation 3.1.4 Coefficients 

(RGDP Is Dependent Variable) 

Constant -642.38 

(-0.375) 

 

Constant 

-8.66 

(-0.286) 

MCAP(-1) 1.332 

(2.564) * 

MCAP(-1) 0.003 

(2.09) * 

VTR(-1) -26.916 

(-2.19) * 

VTR(-1) 0.188 

(3.09) * 

TVR (-1) 216.94 

(1.68) 

TVR (-1) -3.969 

(-2.09) * 

OPN(-1) 691.18 

(2.17) * 

OPN(-1) -7.27 

(-2.59) * 

RGDP(-1) -18.274 

(-1.58) 

RGDP(-1) 1.307 

(10.01) * 

FPI(-1) -127.71 

(-0.77) 

R
2 
 = 0.99 

R
-2  

= 0.98 

DW = 2.32 M2(-1) 124.51 

(2.23) * 

INDX(-1) -0.043 

(-0.88) 

  

R
2 
 = 0.94 

R
-2  

= 0.92 

DW = 1.92 

  

  

  
                          Note: * (significant @ 5 percent LOS). 

 
Table-4.1.2. Wald Coefficient Test: 

Test Statistic Value Df Probability 

F-statistic  123679.9 (8, 21)  0.0000 

Chi-square  989439.0  8  0.0000 
                   Source: Authors computation using E-Views.  

  

4.2. Interpretation of Result 
The Table 4.1.1 above conveys the result of GMM procedure applied to equations 3.1.2 and 3.1.4 on the impact 

of reforms on capital market development and that of the effect of capital market development on economic growth 

in Nigeria over the period of 1984 to 2014. 

From equation 3.1.2, the constant coefficient which is negatively signed indicates that there will be a decrease of 

642.38 in the value of market capitalization if other variables were zero. However, the figure is not significant at 5 

percent significance test. On the lagged explanatory variables, the result presented a significant impact of the 

combined explanatory variables on the dependent variable. This is revealed by the adjusted R-squared of 0.92. On 

the contributions of the individual explanatory variables to explain the dependent variable; lagged values of market 

capitalization (MCAP), volume of shares traded (VTR), openness of the economy (OPN) and Money supply (M2) 

were highly significant at over 5 percent to determine capital market development over the period of our study in 

Nigeria. Particularly, the VTR, though it appeared with wrong sign, yet was significant. The same is applicable with 

Real Gross Domestic product (RGDP), foreign portfolio investment (FPI) and the index of stock prices (INDX). 

Their various signs are indication that when these variables increase by 1 percent, the market capitalization decreases 

by the coefficient assigned to each of these explanatory variables. The turn - over ratio (TVR) in particular, though 

insignificant at 5 percent level, it contributed positively and has a large coefficient of 216.94. The result supports the 

finding that the market liquidity rates have positive impact on stock market capitalization.  According to Levine and 

Zervos (1996) Liquidity helps investors to facilitate investment projects and make them less risky. Again the result 

has re-emphasized the importance of openness of the economy. The coefficient of OPN was positive, significant and 

large. It is clear that openness engenders positive development in the stock market. But the foreign portfolio 

investment (FPI), though it has large coefficient, it appeared with negative insignificant sign. This indicates that 

foreign portfolio investment in Nigeria is not yet adequate to contribute positively and significantly to capital market 

development. It implies that what is taken out of the capital market in terms of capital flight is more than what comes 

into the market in form of portfolio investment. Also on the result of money supply, it is indicative that increase in 

money supply make for positive and significant development of the stock market. The coefficient of money supply 

(M2) is very high at 124.51. The RGDP contributed negatively and insignificantly to capital market development in 

Nigeria over the period of our study. On the whole, the R
2 

and R
-2 

of 0.94 and 0.92 respectively, indicates that capital 

market development is adequately explained by the model. By implication, 94 percent variations in capital market 

development are explained by the explanatory variables. The Durbin-Watson (DW) statistics of 1.92 which is 

approximately „2‟ indicates absence of autocorrelation and tends to support the model estimated with the GMM 

procedures. The result and findings shows that there is significant relationship between capital market reforms and 

capital market development. This result is consistent with the findings from the studies by Yartey (2008); Idowu and 

Babatunde (2012) and Audu (2015). 

On the other hand, column 3 and 4 of Table 4.1.1 shows the result of equation 3.1.4 where RGDP appeared as 

the dependent variable. It is noteworthy that the three indicators of capital market development (MCAP, TVR and 



Economy, 2016, 3(1): 31-39 

 

 

 

 

38 

 

VTR) yielded significant results to influence economic growth. The MCAP and VTR had positive signs, while TVR 

appeared negative. The openness of the economy (OPN) was significant but had negative sign. The lagged value of 

RGDP was highly significant and positive, to explain changes in current RDGP. 

The result from R-squared and its adjusted value of 0.99 and 0.98 respectively, indicated that economic growth 

in Nigeria is adequately explained by the model over the period of 1984 to 2014. Durbin -Watson (DW) of 2.32 

which is approximately „2‟ indicates absence of autocorrelation. This implies that the analysis is free from the 

problem of serial correlation, and tends to support the model estimated with the GMM procedure. From the 

evaluation made we can therefore reject the null hypotheses and accept the alternative hypotheses that there is 

significant relationship between capital market reforms and economic growth in Nigeria. The result are consistent 

with studies by Levine and Zervos (1996); Anyanwu (1998); Ohiomu and Godfrey (2011); Kolapo and Daramola 

(2012) and Audu (2015). 

Also the result of Wald coefficient test on Table 4.1.2 shows a chi-square value of 989439 and probability   value 

of 0.0000. The low probability value is indicative that the null hypothesis is strongly rejected. Therefore, the 

coefficient are asymmetric (i.e. significantly different from zero) as evidenced by the low probability values. 

 

5. Summary and Conclusion 
The analysis done in this study has shown that the capital market reforms introduced in Nigeria over the period 

of 1984-2014 had significant positive impact on stock market development and economic growth in Nigeria. The 

reform variables such as volume traded (VTR), turnover ratio (TVR), market capitalization (MCAP), openness 

(OPN), money Supply (M2) and RGDP had significantly impacted the models of our study over the periods covered 

by the study. All these implies that further reforms especially in market security, sensitization  and  widening  the 

participation zone to incorporate rural dwellers and small firms will go a long way to develop the capital market in 

particular and the economy in general. 
 

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Table-4.1. Stock Market and Other Economic Development Indicators ( 1984 – 2014) 

YEAR  MCAP       VTR         TVR      FPI         GDP            M2            OPN         INDX 

1984 3.000000 0.140000 2.140000 0.030000 183.5600 33.72000 0.090000 118.5000 

1985 3.280000 0.160000 2.080000 0.930000 201.0400 32.84000 0.090000 127.3000 

1986 3.300000 0.240000 1.370000 0.050000 205.9700 34.43000 0.070000 163.8000 

1987 4.000000 0.190000 2.140000 0.050000 204.8100 26.20000 0.240000 190.9000 

1988 4.550000 0.390000 1.180000 0.050000 219.8800 27.58000 0.240000 233.6000 

1989 5.410000 0.260000 2.100000 0.050000 236.7300 21.17000 0.380000 325.3000 

1990 6.090000 0.080000 7.230000 0.040000 267.5500 19.76000 0.580000 513.8000 

1991 8.700000 0.090000 9.540000 0.050000 265.3800 24.16000 0.790000 783.0000 

1992 11.50000 0.180000 6.350000 0.080000 271.3800 20.86000 1.290000 1107.600 

1993 17.28000 0.290000 5.910000 0.240000 274.8300 24.18000 1.400000 1543.800 

1994 24.07000 0.360000 6.720000 0.260000 275.4500 25.59000 1.340000 2205.000 

1995 64.11000 0.650000 9.810000 0.420000 281.4100 14.95000 6.060000 5092.200 

1996 97.30000 2.380000 4.090000 0.420000 293.7500 12.80000 6.370000 6992.100 

1997 93.34000 3.420000 2.730000 0.420000 302.0200 14.75000 6.910000 6440.500 

1998 84.47000 4.370000 1.930000 0.490000 310.8900 18.02000 5.110000 5672.700 

1999 96.10000 4.510000 2.130000 0.490000 312.1800 19.69000 6.570000 5266.400 

2000 143.4800 8.550000 1.680000 0.480000 329.1800 19.17000 8.900000 8111.000 

2001 185.5800 16.16000 1.150000 0.450000 356.9900 26.86000 9.040000 10953.10 

2002 176.5700 13.71000 1.290000 0.380000 433.2000 21.79000 7.520000 12137.70 

2003 284.6500 25.21000 1.130000 0.370000 477.5300 23.01000 10.82000 20128.90 

2004 400.4200 42.80000 0.940000 0.470000 527.5800 18.68000 12.49000 23844.50 

2005 516.1000 46.79000 1.100000 0.580000 561.9300 18.10000 17.88000 24085.80 

2006 859.4900 78.93000 1.090000 0.810000 595.8200 20.46000 18.02000 33189.30 

2007 2096.110 169.6500 1.240000 0.870000 634.2500 24.82000 20.01000 57990.20 

2008 1422.640 249.8000 0.570000 0.590000 672.2000 32.96000 23.93000 31450.80 

2009 977.9000 95.37000 1.030000 0.610000 718.9800 37.96000 18.72000 20827.20 

2010 1277.570 14.27000 1.240000 21.25000 776.3300 32.47000 24.53000 24770.50 

2011 1159.560 25.20000 1.510000 26.01000 834.1600 32.42000 39.41000 20730.60 

2012 14800.90 21.02000 9.710000 41.64000 717.1400 21.17000 20.40000 28078.80 

2013 19077.40 34.40000 7.330000 56.33000 800.9300 13.89000 19.70000 41329.20 

2014 16127.82 76.12000 0.820000 16.26000 890.4400 15.16000 19.20000 34557.20 
     Sources: CBN, SEC, NBS and NSE Year Book Various Issues. 
 

 

 

 

 

 

 

 

 

 

 

 
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