Stock Market Development and Economic Growth: Empirical Evidence From an Institutional Impaired Economy

The research investigated the relationship linking stock market development and economic growth from 1985 to 2018. In measuring growth, Gross domestic product (GDP) was adopted, while stock market was surrogated by turnover ratio, market-capitalization, and value of sharetraded, sourced from the Central Bank of Nigeria (CBN) and the Security and Exchange Commission Database. The inclusion of money supply (M3) captured innovation (financial) in the monetary sector. In investigating the aforementioned relationship, the ARDL Bound test methodology was adopted. Empirical results from the investigation confirm the existence of a long-run relationship between stock market development and growth. Similarly, there was a positive relationship between indices of stock market development and growth, albeit statistically insignificant. The study concluded that financial institutions should concentrate on financial innovation in other dimensions in other to boost stock market performance that will result in sustainable growth.


Literature Review
The relevance of the contribution of the financial system in improving and promoting development cannot be overemphasized. The financial sector comprises the Central Bank, commercial banks, Investment companies, brokerage firms, discount houses, and the stock exchange, to name just a few. These institutions trade in financial instruments that include stocks, derivatives, foreign and domestic currencies, shares, and so on, and mobilize funds from surplus to units of deficit in the same process. This helps to boost investment and increase production for businesses and corporations, thereby accelerating growth. The debate on the functioning of the financial system began with Schumpeter (1912), who argued that banks operate in a well-functioning financial system to stimulate economic growth by stimulating technological innovation by identifying and financing entrepreneurs with the best opportunity to launch innovative products, in addition to the production process. Levine (1991) was of the opinion that a well-developed stock market possesses the capacity to absorb liquidity shocks and productivity shocks of businesses. In the same vein, Levine & Zervos (1998) and Khan & Senhadji (2000) have pointed out that the establishment of the stock market has made significant contribution to the growth of financial institutions in emerging-market economies. The expansion of the financial sector (including the stock market) is therefore assumed to make substantial contribution to growth. Table 1 and 2 shows key stock market growth metrics (stock market size, depth, and market stability) for the period 1985-2018. Prior to onset of the global financial crisis and financial sector reforms in 2005, the Nigerian stock market was well adjusted, as market indices (market capitalization, market turnover, value of shares traded and the all-share index) rose from low to historically high levels. For instance, market capitalization increased from N5bn in 1985 to N18.3bn in 1990, and further increased to N165.10bn in 1995, representing an increase of about 13.56 percent as a share-of-GDP. In 2000 and 2005, market capitalization was set at N379.71bn and N2, 066.80bn, representing an increase of 51 percent as a share of GDP. This period marks the entrant into the era of post consolidation. The rapid development of the stock market, however, was primarily the result of stock market trading which resulted in just few stocks, accounting for a substantial part of overall market capitalization. There are unsmilingly informational and disclosure deficiencies for other securities, as well as stern flaws in the lucidity of transactions in the market, away from these active-traded shares. Similarly, market turnover resumed a growing trend, increasing from 2000 to 2005 to 6 percent to 10.1 percent. The all-share index also performed well, rising from 117points in 1985 to 3,815 points in 1995 and further to 6,701 points in 2000. The all-share index peaked at 50,424points in 2008 and was steadily decreasing to 37,186 points in 2018. Regrettably, as market metrics deteriorated quickly, the boom experienced in the market was upturned. For example, market capitalization in 2018 currently stands at N16,185.7billion, indicating a decreasing GDP ratio of 7.36 percent, while market turnover reported a decline of around 7 percent in 2018 compared to 10.10 percent in 2010 (CBN Annual Report, 2019).  Pagano (1993) argued that the stock-market contributes to the mobilization of domestic savings by strengthening the array of financial instruments available to savers in diversifying their portfolios, thereby providing a significant source of investment capital at a relatively low cost. A well-functioning and liquid stock market that provides investment opportunities to diversify unsystematic risks can improve capital's marginal productivity. Taking a retrospect at the World Federation of Exchanges in Paris, it is shown that overall global stock market capitalization, rose from US$40.4 in 2005 to US$50.9 trillion in 2010 (World Bank, 2019). As indicated in figure 1, the overall world stock market capitalization saw a steady rise per year from 92.52 percent in 2005 to 111.83 percent in 2017 and decreased to 92.92 percent in 2018 in terms of its share-of-GDP in terms of its share in GDP. Total global stock market capitalization, which in 1995 amounted to US$ 66.04 trillion; increased to US$ 111.83 trillion in 2017, nearly double the rise over seventeen (17) years. By comparison, stock market capitalization in Nigeria is experiencing an increasing trend. Successive periods (2016-2018) for market capitalization and market turnover ratio experienced undulating patterns which signifies poor performance underdevelopment of the stock market. The rapid development of global stock indicators (that is, market capitalization) has attracted serious attention of policymakers; thus focusing on the reasons for the under performance of the stock market in developing countries around the world over the last few decades, giving room to explore other dimensions that will result in the effective development the stock market and growth of developing economies (Deb & Mukherjee, 2008) (2017), Karim & Chaudhary (2017) either found that the development of stock markets had a positive impact on economic growth or had no significant effect on growth. The results showed bi-directional relationship between shifts in the stock market and economic growth.

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Altarturi & Abduh (2016) Malaysia -Granger-causality The results revealed that there is a bidirectional relationship between Islamic stock markets and Malaysian growth, and appears that the contribution to growth is indirect in relation to its effect on investment.

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Osamwonyi & Kasimu (2013) Nigeria, Kenya andGhana 1989 -2009 Johansen co-integration/ Granger causality In Ghana and Nigeria, no causal link was identified between the development of the stock market and economic growth. In comparison, Kenya had a bi-directional causal link between stock market development and growth.

1993-2009
The findings showed no major correlations between the returns on a country's stock market and its performance in GDP. However, the findings indicate that in order to achieve a healthy and sustainable quality of life, economic growth in the LDCs must be accompanied by the subsequent improvement in income distribution, social security openness and accountability Empirical results indicate that Mauritanian stock market output was higher than Nigeria's and the same for GDP. However, stock market performance has had a negative impact on economic growth in Mauritius and Nigeria due to the fact that emerging markets are giving attention to the money market while relegating the stock market to the background.

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Karim et. al (2017) 2 In Asian regions (South and East Asia)

1996-2015
Linear Panel method Empirical results indicated that the development of the stock market contributes to some degree to economic growth of the South Asian region, but its effect on East Asian region has proven to be negligible.

Methodology
The study adopts the ARDL model fundamentally centered on the following premise. First, regardless of the sample size, the ARDL model is advanced (Ghatak & Siddiki, 2001). Secondly, particularly when the variables are integrated of different order (that is integrated at order zero or one), the method is further suitable. Third, modelling ARDL with the appropriate lags is standard for both the indigeneity problem and serial correlation, and fourth, the model can estimate the short and long-run relationship, thus providing unbiased estimates (Pesaran et. al, 2001). So, it is possible to express a simplified ARDL model as; Where, the long-run coefficients are ( 1  , 2  , 3  ) whose sum of which corresponds to the ECM and, 1  , 2  , 3  are the short-run coefficients. The generalized ARDL model for investigating the effect on growth of the stock market is specified as follows; where t  the stochastic term, 1 t  is the lagged period,  designates differencing of variables and 7 11   are long run coefficients. The unrestricted ECM is formulated as part of the ARDL approach to define the long run co-integration, taking into account each variables to estimate the best-fit model which is shown in the matrix below; The short-run elasticities can be generated by formulating the following error correction; An inflation-adjusted indicator reflecting the value of all goods and services produced following Ishioro (2013); Hasan & Barau (2015) by an economy measured in constant price.

Independent variable Gross fixed capital formation (GFCF)
Measures the net increase in fixed capital as a percentage of GDP Positive

Money supply (M3)
A measure of money supply which includes M2 as well as large time deposits, retail money market funds, short-term repurchase agreements and high liquid assets, emphasizing money more as a store-of-value than as a means of exchange, calculated as a percentage of GDP

Market capitalization (MCAP)
According to Nyasha & Odhiambo (2015, 2016, the aggregate value of the firm based on the current share price and the total number of outstanding stocks that serves as an instrument enabling the investor assess the returns and risk in the share, measured as percent ageof GDP.

Turnover ratio
This ratio represents the proportion of stocks that changes in a fiscal year. This is used to evaluate the company's efficiency on how it uses its assets to generate revenue, measured in percentage ponts, following Nyasha & Odhiambo (2015, 2016 Positive

Value of stock traded (VALTRD)
According to Nyasha & Odhiambo (2015, 2016, this refers to the total number of shares-traded, both domestic and foreign, multiplied by their respective matching prices Positive Source: Compiled by Author    The stationarity test in Table 6 indicates mixed order of integration. Economic growth is stationary at level, I(0), whereas at first difference, other variables (capital formation, money supply, market capitalization, turnover ratio and value traded) are integrated at order one, I(1). A mixed order of integration allows the adoption of the ARDL bounds test, based on the aforementioned result, to capture the long-run cointegration among the variables, Pesaran et. al (2001). across all three models. This means that the no cointegration hypothesis against its alternative is dismissed at c.v (1%, 5% and 10%). The computed F-statistic of 6.725 is higher than the upper bound critical value of 4.35 at 5%, indicating a long-run relationship between market capitalization, gross fixed capital formation, money supply and growth. Therefore, the finding is replicated for the other two models which signifies the depth and efficiency of the interaction of the stock market with growth as revealed from their computed F-statistic values (7.565 and 7.130) respectively. Based on the results shown in table 7, it is evident that stock market development has a long run effect on growth in Nigeria.   1,0,0,1 Empirical results show that growth was positively influenced by the first time lag of the three proxies, albeit statistically insignificant at 5% level. In addition, the long run result reveals that the stability, depth and efficiency effect on growth is lacking. These findings are consistent with empirical studies of (Karim et. al 2017;Okoro G.E;2016, Sinha et. al;2015, Haque;Afolabi, 2015 andEchekoba et. al, 2013). This signifies the need for a proper functioning of the Nigerian stock market to fuel economic growth through capital accumulation and accelerated industrialization. The stock market plays a key role in market-based financial development with asset liquidity, long-run capital adequacy for investment, and efficient use of resources. As a result, a well-functioning stock market remains a crucial indicator of macroeconomic development, attracting long term investment from domestic and foreign investors and thereby playing a key role in accelerating industrialization (Pohoata et. al, 2016;Coskun et. al, 2017. As for the money supply, empirical findings show that it was positively related to growth in equations 1 and 3, although statistically insignificant to growth as seen in table 8. This illustrates the fact that the financial sector has little or no innovation that can stimulate money supply while at the same time minimize investment risk in the economy. The findings are reinforced by other empirical studies (Qamruzzanian and Wei, 2017; Bara & Mudzingini, 2016), while gross fixed capital formation shows a positive relationship to growth in equation one only, howbeit, statistically insignificant.

ADF (prob.) PP (prob.) ADF (prob.) PP (prob.) Decision
The short run dynamic (ECM_ARDL) model is thus analyzed and described in table 9 based on the confirmed long run relationship. The respective speed-of-adjustment to the long run equilibrium is shown in table 9. The result shows that the ECT for each given equation is negative (-1.121, -1.001 and -1.575) and statistically significant. This means that any previous period shocks are to be adjusted at speeds of (112%, 100% and 157%) respectively in the long run. Furthermore, all indicators except the turnover ratio showed positive effects on growth, howbeit statistically insignificant. This suggests that capital adequacy has not produced the desired economic impact in delivering a significant long run effect for the Nigerian economy. For all three equations, financial innovation (M3) has a positive effect on growth, albeit statistically insignificant. This means that, to some degree, money supply in the economy has supported in recuperating output levels and reduce cost, but has not been successfully in the short-run, but can have long run economic effects. Capital formation showed a positive but marginal effect on growth, indicating theoretically that money supply in the economy, either in the form of capital formation or investment, would stimulate growth by increasing economic activity. Diagnostic tests were performed to assess the validity of the model, including the heterscedasticity test, the test of normality and Ramsey-Reset test (Pagan and Hall (1983). It shows that all statistics are significantly higher than 5 percent, indicating that there is no heteroscedasticity problem and first order serial correlation, usually a desirable indicator of a stable econometric model.

Conclusion and Recommendations
This study critically investigated the link between stock market development and economic growth in Nigeria for the period, 1985-2018. Reviewed current and existing literature revealed quite a few empirical studies on the subject matters in developed, emerging and developing economies. There have been a number of studies, but a few have been performed on the relationship between stock market development and economic growth has been conducted (Osamwonyi & Kasimu (2013); Edame et. al (2013);Echekoba et. al. (2013); Okoye & Nwisienyi (2013) and Ishioro, 2013) among others and a limited number of others focused on stock market-led growth. Seeing the void in existing studies, the study explored a new dimension in stock market development along with financial innovation, where money supply (M3) was used to capture innovation-effect on growth. The study adopted the ARDL Bound test methodology, in order to encapsulate the long run relationship between stock market development and economic growth.
The bounds test demonstrates the existence of a long run relationship for all three (3) models tested. The findings clearly support a long-run relationship between stock-market development and Nigeria's economic growth. In explaining the long-and short run elasticities, findings revealed that stock market development metrics have positive long-and short run impact on economic growth, although insignificantly. This implies that the development of Nigeria's stock market will potentially improve short-and long run growth of the economy by increased depth, stability and efficient financial institutions, capital accumulation and long term capital adequacy. Financial innovation, proxied by M3, had positive impact, albeit statistically insignificant, on economic growth both in the long and short run periods. This shows that stock market financial innovation is expanding financial services by creating new and accelerated institutions, assets and services that eventually lead to accelerated growth.
As far as financial innovation and its effect on growth, innovation is concerned; innovation plays a crucial role in the development of the stock market, as it creates room for the expansion financial activities in the economy by developing new mechanisms and forms of financial institutions. Therefore, policies aimed at making Nigeria's capital market more financially innovation-oriented should therefore be implemented in order to provide large number of households and firms with integrated services, which then can then contribute to the growth cycle.