IMPACT OF FINANCIAL LIBERALIZATION ON THE EFFICIENCY OF THE NIGERIAN STOCK MARKET: 1986-2011
Abstract
Using Nigeria aggregate level data
for 26 years: 1986-2011, the study estimates the impact of financial
liberalization on stock market efficiency in Nigeria. The study used the
Generalised Least Square (GLS) to estimate the four hypotheses
formulated for the study. The ratio of stock market capitalization to
gross domestic product, ratio value of shares traded to gross domestic
product, ratio of all share index to gross domestic product, and ratio
of value of shares traded to market capitalization were adopted as the
dependent variables, while the independent variable was financial
liberalization (percentage in foreign equity ownership). The study also
controlled for some macroeconomic variables such as exchange rate,
inflation rate and interest rate that might impact on the dependent
variables. The results showed that the regression coefficient for
financial liberalization was negative and non-significant in predicting
or promoting four proxies of stock market efficiency, which supports the
preposition that financial liberalization does not transform or promote
stock market efficiency. Based on the results, the study recommends
inter alia: promotion of favourable macroeconomic environment;
formulation of policies that will reduce the impact of speculative hot
money, strengthening of the legal system, stronger transparency in terms
of information disclosure, the need for the establishment of effective
and efficient Dispute Resolution Mechanism, the urgent need to rethink
the tenure of the market; among others.
CHAPTER ONE
1.0 INTRODUCTION1.1 Background of the Study
The issue of market efficiency, as
espoused by Fama (1965, 1970), which posits that prices fully reflect
available information has remained at the heart of financial economics
literature. Lim and
Brooks (2011), state that the efficient
market hypothesis defines an efficient market as one in which new
information is quickly and correctly reflected in its current security
price. Generally, the argument is based on the assumption that at any
given time, prices of stocks fully reflect all the available information
related to them. This is the path toed by Marashdeh and Shrestha
(2008), Maghyereh (2003), Bashir, Ilyas and Furrukh (2011), among
others.
For the market to be efficient, the
prices of stock must reflect company fundamentals, state of the economy
and most importantly, the law of demand and supply, which can only come
to fruition through liberalising the stock market (Kawakatsu and Morey,
1999; Waliullah, 2010). Proponents of this theory have documented
extensive evidence to show that financial liberalization promotes stock
market development (Ortiz, Cabello and Jesus, 2007). Against this
background, the effects of financial liberalization on stock market
efficiency has remained a core issue in finance literature, more so,
considering efforts by governments especially in the developing
countries to liberalize their financial markets in order to catch up
with the developed countries on one hand and to integrate their
economies to the global economy on the other. The impact of financial
liberalization on the stock returns and volatility is an important issue
for researchers, regulators and investors (Nazir, Khalid, Shakil and
Ali, 2010).
An illustrative list of studies of the
effects of financial liberalization on stock market efficiency includes
those by Henry (2000) who found that stock market liberalization may
reduce the liberalizing country’s cost of equity capital by allowing for
risk sharing between domestic and foreign agents; Kim and Singal (2000)
found that stock returns increase immediately after market opening
without a concomitant increase in volatility; Bekaert, Harvey and
Lundblad (2003) report that integration affects
the functioning of the equity market, the cost of capital, the
diversification ability of local participants, the level of prices, the
business focus of local companies, and foreign capital flows while the
empirical findings of Levine and Zervos (1998) show that stock markets
tend to become larger, more liquid, more volatile, and more integrated
following liberalization and Grabel (1995) states that financial
liberalization induces increased asset price volatility. On his part,
Miles (2002) reports that reforms has a statistically significant impact
in almost three fifths of the emerging markets surveyed, but more often
than not, the effect is actually to raise, rather than lower the
volatility of stock returns. In this connection, therefore, the highly
articulated view of Levine (2001) which states that international
financial integration can promote economic development by encouraging
improvements in the domestic financial system is worth noting.
Specifically, Bekaert and Harvey (1995)
explain that markets are completely integrated if assets with the same
risk have identical expected returns irrespective of the market. A
prominent line of research suggests that financial development has a
causal influence on economic growth (Ujunwa and Salami, 2010). However,
Stigliz (2004) in his criticism of the International Monetary Fund (IMF)
policy of pressuring countries into liberalizing their capital markets,
reports that economists, particularly in developing countries, had long
expressed doubts about the virtues of capital market liberalization.
The foregoing effects especially the
aspects detailing the positive imparts of liberalization, may have
formed part of the reasons why liberalization became a matter of choice
in Nigeria in the 1980s. Financial liberalization which involves banking
reforms, insurance reforms and stock market development, without doubt,
could have significant effect on stock returns and volatility Ojo and
Adeusi (2012) state that in Nigeria, financial sector reform was a
component of the Structural Adjustment Programme (SAP) which was
introduced in 1986. They further state that some of the reforms created
for the money market indirectly affected the capital market activities
simultaneously. Quoting Nnanna, Englama and Odoko (2004), these reforms
according to Ojo and Adeusi (2012) include deregulation of interest
rates, exchange rate, entry/exit into the banking business,
establishment of the Nigeria Deposit Insurance Corporation (NDIC),
strengthening the regulatory and supervisory institutions, upward review
of capital adequacy, sectorial credit guidelines, capital market
deregulation and introduction of direct monetary policy instruments.
Opening of capital markets represents an
important opportunity to attract the necessary foreign capital (Kim and
Singal, 2000). Foreign capital in the nature of portfolio flows may take
a different pattern when the market is made more open following
liberalization. On the issue of regaining access to foreign capital by
developing countries, Bekaert and Harvey (2003) argue that portfolio
flows to developing countries (fixed income and equity) and foreign
direct investment replaced commercial bank debt as the dominant sources
of foreign capital. They argue further that portfolio flows to
developing countries could not have happened without these countries
embarking on a financial liberalization process, relaxing restrictions
on foreign ownership of assets, and taking other measures to develop
their capital markets, often in tandem with macroeconomic and trade
reforms. Specifically, Nigeria was in dire economic crisis in the period
preceding liberalization. Omotoye, Sharma, Ngassan, and Eseonu, (2006)
are of the view that the oil glut of the mid-1980s exposed the
fundamental weakness of the Nigerian economy and greatly intensified the
country’s debt management problems. On their part, Omoleke, Salawu, and
Hassan, (2010) point out that it is a trite fact that, deregulation and
privatization in Nigeria are consequences of failure of the state owned
enterprises. Also, Adeyemo and Salami (2008) see privatization as a
strategy for reducing the size of government and transferring assets and
service functions from public to private ownership and control.
According to Alabi, Onimisi and Enete
(2010), the argument for economic reforms in Nigeria in the 1980/1990s
could be attributed to several reasons among which were: the need for
more money to fund imports, policy reactions towards combating the
impending economic collapse, external shocks of foreign loans; the
enterprises in Nigeria have found themselves in a state of perfidy, low
performance and undoubted inefficiency.
Probably as a result of the foregoing,
the Babangida government in 1986 applied for what was known as the IMF
loan. As part of requirements for the loan, the IMF insisted on certain
conditionalities which prescribed exchange rate depreciation,
privatisation and liberalization. This resulted in a package that later
became known as Structural Adjustment Programme (SAP). It could be
argued that these conditionalities were prescribed as part of
qualifications for the facility and also due to the need for greater
integration of the Nigerian economy into the global economic system.
Anyanwu (1992) argues that the IMF-World Bank economic policy packages
embodied in President Babangida’s Structural Adjustment Programme (SAP)
provided overt encouragement to the fostering of an unregulated,
dependent capitalist development model, while allowing only a supportive
role for the government in a refurbished economic environment of highly
reduced government ownership and control of enterprises.
There is no doubt that these
conditionalities were universal in terms of prescriptions for the
economic ailments of developing and underdeveloped economies
irrespective of backgrounds, structure and individual level of
development even when generally classified as developing or
underdeveloped. To this extent, Ekpo (1992) is of the opinion that the
countries of West Africa continue to experience underdevelopment despite
the economic growth of the early and late sixties. He added that the
sustained crisis, evidenced in low productivity, high rates of
inflation, high rates of unemployment, deterioration in standards of
living, huge external debts, social and political chaos, etc, prompted
virtually all the countries in the West African sub-region to implement,
in one form or another, the typical International Monetary Fund (IMF)
and World Bank adjustment programmes.
Proponents of these prescriptions can
argue that the choice is anchored on the belief that globalisation
increases economic integration of world economies which manifests in
increased trade and investment. In the view of Zekos (2005),
globalization is characterised by structural reforms such as trade and
investment liberalization and increased trade and international
investment flows promoting growth, altering the composition and
geographical distribution of economic activities, stimulating
competition and facilitate the international diffusion of technologies
having significant effects, both positive and negative, for sustainable
development.
But the level of economic development and
the point in the lifecycle of individual economies which could have
formed the basis upon which prescriptions were made appears to have been
inadvertently omitted. In the case of Nigeria, the economy was
characterised by sustained fiscal imbalance and exposure to external
shocks which brought about both domestic and external instability. In
fact, economic deregulation in Nigeria was not a policy option during
the oil boom period of the 1970/1980s as no evidence suggests that
external influence on policy choices at that time was strong. The need
to transmute from a planned to market economy, although, arose through
the influence of the World Bank and IMF, impetus was added by thinking
in the international arena due to what was seen as benefits of the free
market system. Smith, Jefferis and Ryoos (2003) made a strong case for
transition from planned to market economy by stating inter alia: “we
believe success requires a psychological readjustment, a mind-shift from
the failed assumptions of a decadent, centrally planned economy to
those of a competitive, vigorous and expanding free market”. Economic
deregulation implies the breaking down of barriers to trade and finance.
Financial market liberalization was a
major component of economic deregulation in Nigeria. The need to
liberalize Nigeria’s financial market may have been hinged on the need
to build an efficient and sound financial sector which is vital for
poverty reduction and economic growth. The financial sector before
deregulation was not well developed and the range of institutions in the
sector was narrow. As a result of this, banks played a limited role in
the economy and cash remained the dominant financial instrument. There
was, therefore, the need to enhance the financial market infrastructures
to enable market deepening.
The importance of stock market
liberalization cannot be over-emphasized. On his part, Henry (2000)
argues that stock market liberalization is a decision by a country’s
government to allow foreigners purchase shares in the market. He added
that standard models of international asset pricing predict that stock
market liberalization may reduce the liberalizing country’s cost of
equity capital. It should be noted that stock market liberalization does
not end with just allowing foreigners to purchase shares. It equally
entails general lessening of controls and aligning the market to
international best practices such as establishing institutional
frameworks that will facilitate market development and enhance
regulatory roles. Sharma and Vashishtha (2007) are of the opinion that
innovative changes in financial institutions, regulatory structures and
practices, and financial instruments occur, from time to time, over a
long period. They explained further that these changes affect the
generation, mobilisation and distribution of savings, which are
important for shaping the direction and pace of growth of an economy. It
is therefore expedient to find out how liberalization has impacted the
Nigerian Stock Market which in turn might have affected the endogenous
growth model in Nigeria.
In liberalizing the financial market, the
capital market became a component part of the process being a cardinal
part of the financial sector. The capital market which represents a
major arm of the financial market can be likened to any other market for
assets, e.g. the property market.
Trading in assets of different types is
the major function. Fischer and Jordan (1995) argue that a securities
market is a broad term embracing a number of markets in which securities
are bought and sold. They explain further that one way in which
securities markets may be classified is by the types of securities
bought and sold. Their argument centred on the classification of
securities markets; whether the securities are new issues or are already
outstanding and owned by investors. Another classification according to
Fischer and Jordan (1995) is by maturity: securities with maturities of
one year or less normally trade in the money market; those with
maturities of more than one year are bought and sold in the capital
market. Markets, however, differ in some respects which were identified
by Hutchison and Nanthakumaran (1998) to include presence or absence of a
central trading system, homogeneity or otherwise of assets, low versus
high lot value of assets traded, quality of available information and
number of market participants.
There is a linkage between macroeconomic
variables and stock market returns as several models (arbitrage pricing
theory (APT), aggregate demand and aggregate supply (AD/AS), monetary
transmission mechanisms, etc] provide a basis for the long-run
relationship and short-run dynamic interactions among macroeconomic
variables and stock prices (Ibrahim and Aziz, 2003). This linkage
implies that policy reactions to economic problems impacts the financial
system (both money and capital markets).With the adoption and
subsequent implementation of SAP, what could be regarded as economic
deregulation in Nigeria evolved. The outcome of this was financial
market liberalization and a later boom in both the money and capital
markets. With specific reference to the capital market, Ujunwa and
Salami (2010) point out that overall, equity culture is increasing among
Nigerians.
Due to financial market liberalization in
Nigeria, restrictions were lessened and equities listed on the Nigerian
Stock Exchange became a serious class of asset to consider in any
investor’s portfolio whether local or foreign. That is to say that
financial market liberalization provided an opportunity for a stronger
interconnection of the local economy to the global economic community
especially in the area of funds flow. Loungani and Razin (2001) show
that economists tend to favour the free flow of capital across national
borders because it allows capital to seek out the highest rate of
return. They identified risk diversification and spread of best
practices in corporate governance, accounting rules, and legal
traditions as some of the apparent advantages. On their part,
Smith-Hillman and Omar (2005) argue that advances in communication and
transportation have created new opportunities that now place Less
Developed Countries on the menu of choice in spite of the relatively
higher degree of political risk. How Nigeria has benefited from these
advantages warrants an empirical examination. This study, therefore, is
modelled after the studies by Kawakatsu and Morey (1999) and Auzairy,
Ahmad and Ho (2011) in the areas of liberalization and efficiency of
emerging stock market prices; and impact of stock market liberalization
and macroeconomic variables on stock market performances respectively.
The stochastic behaviour of the NSE has
not been fully addressed in previous studies. Such issues include
stochastic dominance, conditional heterascedasticity, chaotic behaviour
and stock market efficiency. The need for this type of study has been
justified by Jarrett and Kyper (2005) who argued that studies of capital
market efficiency are important as they infer that there are
predictable properties of the time series of prices of traded securities
on organised markets.
While Okpara and Nwezeaku (2009) were
concerned with whether idiosyncratic risk can be diversified in the
Nigerian stock market; Donwa and Odia (2010) analyzed the impact of the
Nigerian capital market on her socio-economic development. Olowe (2009)
on his part addressed the relation between stock returns and volatility
in Nigeria in the light of banking reforms, insurance reform, stock
market crash and the global financial crisis. The five year data (2004 –
2009) he employed in his analysis ordinarily looks small but is
suitable for the type of study he carried out as he primarily looked at
the effects of global financial crises on stock return and volatility.
The current global financial crisis is a cycle that will give way to the
normal stable stock market situation, although, factors which
contribute to the equilibrium of the market may never be the same again.
On their part, Asaolu and Ogunmuyiwa (2011) investigated the impact of
macroeconomic variables on Average Share Price. None of these studies
specifically addressed the impact of financial liberalization on stock
market efficiency in Nigeria, which is the hallmark of this study.
Furthermore, the effects of announcement of liberalization of the
financial sector on the stock market performance have not been
particularly addressed. Bekaert, Harvey and Lundblad (2003) identified
the methods by which researchers can date the integration of world
equity markets. The dating, according to them is a critical exercise and
only when dates are established can research begin to measure the
impact of liberalization. This, we have done which defines the scope of
this study and our study considered financial liberalization index while
measuring economic activity and also analyzed the impact of
liberalization and size of financial market on stock returns in the case
of Nigeria which to our knowledge has not been done before; and
therefore, makes this study novel.
Specifically, the study investigated the
relationship between financial liberalization and stock market
indicators while controlling for the effects of macro-economic variables
(interest, exchange and inflation rates) in the context of an emerging
economy. Kim and Singal (2000) enthuse that opening of capital markets
represents an important opportunity to attract the necessary foreign
capital which also hastens the development of equity markets that is
positively related to long run economic growth and a reduction in the
cost of external finance. Also, Karolyi (2002) submits that in most
empirical studies, the process of market liberalization focuses on
important events that facilitate cross-border capital flows.
Examples include regulatory actions, such
as the relaxation of foreign currency controls or foreign ownership
limits, and capital market events, such as the introduction of the first
country fund for foreign investors. In measuring capital market
liberalization which he described as a process and not an event, Karolyi
(2002) used the growth and expansion of global cross-listings,
especially in the United States by non United States companies through
American Depository Recepits (ADRs). He defined ADRs as negotiable
claims against ordinary shares in the home market of a company created
by U.S. depository banks that trade over-the-counter, on major United
States exchanges or as private placements. Along this line of reasoning,
the major contribution of this study will be the estimation of changes
in the level of stock market variables (capitalization ratio, liquidity
ratios and returns (ASI)] within the liberalization window.
The short-comings identified by Kawakatsu
and Morey (1999) regarding the liberalization index in Nigeria have now
been overcome as Bekaert, Harvey and Lundblad (2003) identified August,
1995 and May 1998 as the official liberalization date and first country
American Depository Receipts introduction (indirect means of entering
the market) respectively. Miles (2002) also identified August 1998 as
official liberalization dates while Jeferris and Smith (1995) point out
that restriction on foreign participation were removed in 1995 since
when foreign-owned brokerages have been permitted and controls on
foreign participation in the ownership of
Nigerian companies have been removed.
Kawakatsu and Morey (1999) point out that identification of
liberalization date has been described as the most significant
liberalization of the market stating further that only a few authors
focus on the effect of liberalization on stock market efficiency. This
also makes this study unique. There is therefore a knowledge gap in the
literature that warrants a more robust approach. We, therefore,
investigated in this study the impact of financial liberalization on the
efficiency of the Nigerian Stock Exchange from the announcement year.
1.2 Statement of Problem
The implications of financial market
liberalization on stock market efficiency have generated a lot of
controversy. The basis for this controversy is whether financial market
liberalization has had any effects on the efficient hypothesis of stock
markets. Empirical evidence along this line is surrounded with mixed
results. In the case of the efficiency of Arab stock markets, Abdmoulah
(2010) argues that since efficiency improvements seem to be positively
related to market size, efforts to expand and deepen these markets
should then be a prime concern. Bekaert, Harvey and Lundblad (2003)
argue that if liberalization is effective, it leads to market
integration, which has a fundamental impact on both the financial and
real sectors of developing countries.
Potential shortcomings of capital market
liberalization, according to Semmler and Young (2010) are that too fast
liberalized capital markets, with risk assessments solely left to the
market, can trigger boom-bust cycles, the busts precipitated by
financial instability, entailing contagion effects and strong negative
effects on the real sector of the economy. Another problem bothers on
the procedure to adopt in order to systematically identify the date of
Nigeria’s stock market liberalization. Henry (2000) points out that
official policy decree dates are used when they are available; otherwise
two alternatives are used; viz: firstly, permission of foreign
ownership through country funds (for example, American or Global
Depository Receipts) i.e. since government permission is presumably a
necessary condition for establishment of these funds, the date when the
first country fund is established is used as proxy for the official
implementation date. Secondly, indirect capturing of official
implementation dates by monitoring the IFC’s Investability Index.
According to Henry (2000), the investability index is the ratio of
market capitalization of stocks that foreigners can legally hold to
total market capitalization. He adds that a large jump in the
investability index (at least 10% increase) is evidence of an official
liberalization. To this end, this study contributes importantly to both
the literature on financial liberalization and literature on stock
market efficiency and also policy implications of these whether to
liberalize more or curtail same.
Many scholars point out the importance of
the financial system in mobilizing savings, allocating capital, and
easing risk management which they argue is achievable with an efficient
stock market. Besides, some theories provide a conceptual basis for the
belief that larger, more efficient stock markets boost economic growth;
while others argue that the idea of market efficiency has fallen into
disrepute as a result of market events and growing empirical evidence of
inefficiencies. Admittedly, Cho (1986) points out that the literature
on financial liberalization has emphasized the role of the banking
sector, which is correctly perceived as the only organized capital
market in most developing countries; he, however, points out that it has
neglected the potential role of equity markets for efficient capital
allocation and risk sharing in a liberalized financial environment.
Furthermore, while the argument for financial market liberalization has
gained currency, some empirical results differ. One of which is the
outcome of a study by Auzairy, Ahmad and Ho (2011) which explored the
effects of macroeconomic factors: exchange rates, interest rates and oil
prices, on stock market performances in Malaysia, Thailand and
Indonesia. The two conclusions supported by the results of their study
are: firstly, subsequent stock market liberalization policies
implemented in and after 1997 are not significantly effective in
improving stock market performances of the liberalizing countries; and
secondly, macroeconomic variables have significant impact on the
performances of liberalizing countries’ stock markets in some of these
events.
The stock market in Nigeria prior to
financial market liberalization was characterized by paucity of
financial instruments, low turnover ratio and the dominance of
government securities. Other features of the markets include: poor
infrastructure, illiquidity, inactive bond market, non automation of
trading system and large unclaimed instruments, among others. It was
generally believed that the problems that bedeviled the stock market
will be ameliorated by financial market liberalization. Liberalization
was expected to lead to stock market efficiency which will enable
domestic financial institutions duplicate innovations from their more
advanced counterparts by offering options and other derivative
instruments that are important for shaping the direction and pace of
economic growth and development. Although, the market has witnessed
growth in key market indicators such as all-share index and market
capitalization in recent years but it could not withstand the
debilitating effects of the current global economic meltdown.
Investments worth billions of dollars have been wiped off despite the
long-held belief that financial market liberalization will lead to
market stability. Does this, therefore, mean that after several years of
so-called financial market liberalization, most of the expected
benefits have eluded Nigeria?
This importance can be seen from the
perspective of savings mobilization, capital allocation and easing risk
management. As the world becomes a global village, rent seekers know no
boundaries as international relationships in the arena of politics,
science and technology and funds movement create new opportunity set.
Defining economic globalization, Gaburro and O’Boyle (2003) see it as
the practice of economic agents (business enterprises, banks, and
finance companies) working in different countries and serving the world
market without a prevailing national base. This therefore means that
with a well developed stock market, the ever elusive foreign direct
investment could flow into the Nigerian economy following liberalization
as the rate of return on assets before now was not attractive enough
all things being equal. This without doubt will boost economic growth.
It is probably from this angle that Lopez-Mejia
(1999) argues that the heightened
interest of foreign investors in some developing countries has led to
their increased integration into the global financial system, with
benefits for those countries and for the global economy.
Without doubt, financial market
liberalization may mean more funds flow to the domestic economy which is
essential for growth and development. The stock market is a big channel
in this connection, although some issues here are debatable. Despite
often divergent views as to how growth of an economy should proceed,
development economists and planners seem to agree that successful
development requires availability of capital in a sufficient amount
(Agbetsiafa, 1998). A stock market that is well developed and efficient
can provide opportunity for large pool of capital for investment
purposes especially for the long-term.
The above claims and pressure from the
International Monetary Fund compelled the Nigerian government to
deregulate its financial market in 1986. Thus, it has now become
imperative to empirically determine the impact of financial
liberalisation on the Nigerian stock market. This study strives to fill
this important knowledge void using standard measure of stock market
efficiency such as market capitalization ratio, value of shares traded
ratio, stock turnover ratio and all share index (ASI).
1.3 Objectives of the Study
The main objective of the study is to
establish the impact of financial liberalization on stock market pricing
efficiency in Nigeria. To achieve this, the study strives to fulfil the
following specific objectives;
- To establish the impact of financial liberalization on market capitalization ratio (size of the capital market) in Nigeria.
- To identify how financial liberalization has impacted on value of shares traded ratio (liquidity) in Nigeria.
- To establish the relationship between financial liberalization and stock turnover ratio (transaction cost) in Nigeria.
- To determine the relationship between financial liberalization and all share index (aggregate returns) in Nigeria.
1.4 Research Questions
In order to carry out a successful research, the following research questions were postulated to give direction to the study;
- Does financial liberalization have positive and significant impact on market capitalization ratio?
- Does financial liberation have positive and significant impact on the value of shares traded ratio?
- Is there any positive and significant relationship between financial liberalization and stock turnover ratio in Nigeria?
- Does financial liberalization have positive and significant impact on all share index (ASI) in Nigeria?
1.5 Research Hypotheses
In order to systematically and
scientifically enhance the chances of achieving the objectives stated
above, the following hypotheses are proposed for this study:
- There is no positive and significant relationship between financial liberalization and market capitalization ratio in Nigeria.
- There is no positive and significant relationship between financial liberalization and value of share traded ratio in Nigeria.
- There is no positive and significant relationship between financial liberalization and stock turnover ratio in Nigeria.
- There is no positive and significant relationship between financial liberalization and all share index (ASI) in Nigeria.
1.6 The Scope of the Study
Financial liberalization is about the
removal of restrictions as a result of government regulation of economic
affairs. Arguments ensue whenever the word “financial liberalization”
is mentioned especially in Nigeria where there is a divide in public
opinion about the advantages and disadvantages of liberalization. The
benefits of liberalization in some economies have been realized through
privatisation and implementation of policies that minimize price
distortions which are the hallmarks of economic liberalization. Metwally
(2004) shows how most Middle Eastern governments encouraged the role of
the private sector by opening up the economy to international trade and
encouraging competitiveness. With liberalization of the financial
market, the capital market was expected to attain a new level of
efficiency whether the weak-form, semi-strong form or the strong-form.
This work will examine the various concepts of efficiency within the
period: 1986 – 2011. The choice of period was informed by data
availability and the impact of economic liberalization on the stock
market efficiency prior to the global economic meltdown which aggravated
from 2008. This period marks the beginning of events leading to
liberalization announcements and actual period of liberalization and
post liberalization period. We would strive to identify as practically
as possible the advantages of economic liberalization as well as its
disadvantages. Some of the advantages have already been highlighted
above while one of the probable disadvantages is the case of huge
foreign direct investment that may lead to the superimposition of
foreign managerial expertise over local ones as is the case with
multinational-corporations. However, it is succinct to state that the
main focus of this study is to find out how financial market
liberalization has impacted on the efficiency of the stock market in
Nigeria. Although liberalization is a process and continuous; the post
liberalization period terminating in 2011 is deemed convenient for the
purposes of this research exercise.
1.7 Significance of the Study
This study is important since it
investigates the impact of financial market liberation on the stock
market efficiency. This has become important given revelations from most
scholars that financial liberalization will be best located in
economies with favourable macroeconomic environment.
Thus, it is apt to compare stock market
efficiency or performance index with using liberalization index to
establish the pattern and trend of their interactions from the adoption
year till 2011 in Nigeria. Besides that, the study also investigates the
association among stock market indicators, macroeconomic variables and
financial market liberalization in the context of an emerging economy.
The major contribution of this study will be the use of liberalization
index, stock market and macroeconomic variables in the analysis of
market efficiency in Nigeria. Specifically, four sets of stock market
indicators and the level of foreign equity ownership as an index of
financial liberalization and macroeconomic variables were used to
investigate whether liberalization has improved the efficiency of the
Nigerian stock market in line with the prevailing theory of market
efficiency.
The study also accommodated the
short-comings of previous studies on Nigeria such as Kawakatsu and Morey
(1999), Bekaert, Harvey and Lundblad (2003), Miles (2002) and Jeferris
and Smith (1995). These studies estimated for lagged-effect, based on
the assumption that the adoption of financial liberalization will not
have immediate effect on the economy in their crosscountry studies for
developed and developing economies. However, recent revelations have
shown that because adoption of such policy is a national policy that
involves extensive national debate and opinion pull in some cases, the
impact manifests even before the adoption of such policy. Based on this,
it is currently advocated that for any study to contribute to the
debate, it must incorporate the year of policy adoption even if it is
the last month of the year. This study incorporated the postulation by
using the period 1986-2011.
The study will be of immense benefit to the following;
- Policy makers in Nigeria who will derive valuable lessons as the country combats the consequences of a fragile financial sector. There may be need for a rethink of the extent of market openness as a result of privatization.
- The study will provide a basis for investors to evaluate the impact of market opening on the Nigerian stock market behaviour.
- The study will benefit stakeholders in the financial market as it will focus on significant and varied structural changes in the economy as a result of financial market liberalization that has led to meteoric growth in stock market indices before the recent crash. A leeway will therefore be handy.
- Foreign investors will benefit since equities listed on the Nigerian Stock Exchange have become an asset class in globally-diversified portfolios as the study will identify how regulatory reforms have been used to foster stock market development since liberalization has made Nigeria to be interconnected with other economies.
- The findings from this study can provide helpful insights for other stock markets in transition.
- Researchers/academicians will benefit equally as the findings from this research will provide answers to some issues yet to be resolved in the area of study and a platform to initiate future research.
REQUEST FOR PROJECT MATERIAL
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sure your project topic or related topic is found on this website and
that you have preview the abstract or chapter one before making payment.
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topic. The complete research work will cost you N2000 and we will send
the material to you within 24hours after confirming your payment.
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Agada Leonard E.
For: Enems Project.
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