INTRODUCTION
1.1Â Â Â Â Â Â Background of the Study
No nation can achieve sustained economic growth without a financial system. The sourcing of long-term finance through the capital market is essential for self-sustained economic growth, which is consistent with external adjustment and rapid economic growth (Iyola, 2004).
The capital market effectively started operations in Nigeria on 5th June 1961 under the provision of the Lagos stock exchange Act 1961, which transformed into Nigerian stock exchange in December 1977 as a result of the review of Nigerian financial system (CBN, 2007). The Securities and Exchange Commission (SEC) was established in 1979 through the SEC act 1979 to regulate the capital market, but it commenced actual operation in 1980. It took over regulatory functions from capital issues commission, which was established in 1973. Since then various forms  of financial instrument have been issued in the capital market by new and existing business to finance product development, new projects or general business expansion.The Nigerian security and exchange commission (NSEC) is the apex institution for the regulation and monitoring of the Nigeria capital market. The commission was established under the security and exchange commission decree 1979, operating retrospectively from 1st April 1978.
According to Odili and Ede (2015) the general theme of capital formation lies at the very center of the problem of development in developing countries. The so-called developing countries, as compares with developed countries, are less equipped with capital in relation to their population and natural resources.
The primary aim of the Nigerian capital market is therefore to mobilize long-term funds from individuals, investors and corporate bodies and channel the funds to productive activities for economic advancement. The Nigerian Stock Exchange (NSE) is the center point of the capital market while the security and Exchange commission (SEC) serves as the apex regulatory body. To enable small as well as large-scale enterprises gain access to public listing, the NSE operates the main Exchange for relatively large enterprises, and the Second – Tier Security Market (SSM) where listing requirements are less stringent for small and medium – scale enterprises.
The importance of the capital market lies in its financial intermediation role of linking the deficit unit with the surplus unit of any economy. The inability of the capital market to perform this role deprives the economy of much needed financial resources for investment and production of goods and services, (Ewah et al., 2009; Odili and Ezeudu, 2014). The capital market was therefore constituted or established to facilitate the mobilization and channeling of funds into productive investments. Osaze (2000) sees the capital market as the driver of any economy to growth and development because it is essential for the long-term growth in gross fixed capital formation.
It is critical in fund mobilization and allocation for profitable investment projects and production of goods and services. The institutional framework of the capital market has to be put in place to effectively perform its core function of fund mobilization and allocation to ensure that the expectations of investors and fund users are met to induce savings and capital formation (Oke and Adensi, 2012).
Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market but its impact at the macro-economy has been negligible. It is increasingly being recognized that the growth process of the Nigerian economy which depends to a great extent on crude oil revenue and marginally on the provision of long-term funds for gross private domestic and public investment as well as funds for the small and medium – scale enterprises (SMEs) which are the engine of growth in any developing or emerging market economy is very slow. These sectors have been grossly deprived of the need financial resources due to low level of national savings and hence low level of gross fixed capital formation in Nigeria.
This study thereforeexamines the relationship between the Nigerian capital market and the gross fixed capital formation (net investment) and its effectiveness in mobilizing financial resources for fixed capital investment.
It will also proffer policy recommendations for efficient mobilization and allocation of funds in the Nigerian capital market.
In recent times there has been a growing concern on the role of capital market in economic growth and thus the capital market has been the focus of economic policies and policy makers because of the perceived benefits it provides for the economy. The capital market provides the fulcrum for stock market activities and it is often cited as a barometer of business direction. An active capital market may be relied upon to measure changes in the general level of economic activities (Obadan, 1998). Between 1999 and 2014, there was a phenomenal increase in total market capitalization of quoted companies. For example, total market capitalization was N300billion in 1999 and by 2005, it had risen to N2900.06billion, and in 2014 it was N16875.10 (CBN, 2014).
Deducing from the extensive studies on the theoretical expectations on the role of capital markets on economic growth which have formed the core of normative economics, the capital market is expected to contribute to investment through the transmission mechanisms of savings mobilization, creation of liquidity, risk diversification, improved dissemination and acquisition of information, provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, and enhanced incentive for corporate control amongst others (Iyoha and Ekanem, 2004).
According to (Adebiyi, 2005) Equity markets in developing countries until the mid-1980’s generally suffered from the classical defects of bank dominated economies that was characterized by shortage of foreign institutional investors, and lack of investors’ confidence in the stock market. The investment behaviour of a firm depends crucially on its financial structure since apart from technology, managerial and demand problems the only completely exogenous constraint on the diversified firm is the stock market via its impact on company valuation and cost of capital (Odili and Ede, 2015) also Ariyo and Adelegan (2005) contend that the liberalization of capital market led to the growth of the Nigerian capital market but its impact at the macro-economy has been negligible. It is increasingly being recognized that the growth process of the Nigerian economy which depends to a great extent on crude oil revenue and marginally on the provision of long-term funds for gross private domestic and public investment as well as funds for the small and medium – scale enterprises (SMEs) which are the engine of growth in any developing or emerging market economy is very slow (Odili and Ede, 2015).
This study therefore examines the relationship between the Nigerian capital market and the gross fixed capital formation (net investment) and its effectiveness in mobilizing financial resources for fixed capital investment in Nigeria.
The above problem statement thus gives rise to the following question
The broad objective of this study is to investigate the effect of capital market on the private domestic investment in Nigeria whereas the specific objectives of the study includes
1.5Â Â Â Â Â Â Â HYPOTHESES OF THE STUDY
The hypotheses that will guild this study includes
01
: Nigerian Capital Market has no significant effect on domestic investment in Nigeria.1.6Â Â Â Â Â Â Â SCOPE OF STUDY
This study examined the relationship between capital market and private domestic investment in Nigeria. The study covers the period within 1981 – 2014.
1.7Â Â Â Â Â Â Â SIGNIFICANCE OF STUDY
It is expected that this study would consolidate existing literature on the issues surrounding the relationship between capital market and economic growth. The study will also facilitate the examination of the short run and long-run effect of capital market on economic growth and thus boosting the empirical evidence from Nigeria.
The results from the study would be of benefit to investment analyst, investors and corporations in examining the effectiveness of the capital market and thus evaluating the options available for accessing long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing thus improving corporate debt-to-equity ratio prices.