• Document: Evidence on the Dynamic Relationship between Stock Market All Share Index and Gross Fixed Capital Formation in Nigeria
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IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-7668. Volume 17, Issue 1.Ver. I (Jan. 2015), PP 85-94 www.iosrjournals.org Evidence on the Dynamic Relationship between Stock Market All Share Index and Gross Fixed Capital Formation in Nigeria Okwuchukwu Odili, PHD1; Ugwu Paul Ede2 Department of Banking and Finance, College of Management Sciences, Michael Okpara University of Agriculture Umudike, P.M.B. 7267, Umuahia, Abia State, Nigeria. Department of Banking and Finance,College of Management Sciences, Michael Okpara University of Agriculture Umudike, P.M.B. 7267, Umuahia, Abia State, Nigeria. Abstract: This study examines the dynamic relationship between Stock Market All Share Index and Gross Fixed Capital Formation in Nigeria. Annual data on market capitalization, value of shares traded, all share index, average prime lending rate, inflation rate, national savings and gross fixed capital formation at current purchaser’s value from 1980 to 2012 were sourced from the statistical bulletin of the Central Bank of Nigeria and the Nigerian Stock Exchange Fact Book various issues. The ordinary least square (OLS) regression technique was employed in the data analysis and the error correction mechanism (ECM) was used to study the short-run dynamics as well as long-run relationship between the stock market and gross fixed capital formation in Nigeria. The result revealed that all share index of the Nigerian stock market has significant effect on gross fixed capital formation. It further shows that though the capital market has the potential of influencing gross fixed capital formation its’ effect has not been fully realized due to illiquidity and low level of development of the Nigerian capital market. It is recommended that appropriate policy measures been taken to deepen the market and strengthen the structure of the market to ensure that long term funds are used to finance long-term investments. Keywords: Nigerian stock market, all share index, gross fixed capital formation, error correction mechanism, liquidity. JEL – Classification: E21, E22, E44, O16 I. Introduction The general theme of capital formation lies at the very centre 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. Gross fixed capital formation is essentially net investment. It is a component of the Expenditure method of calculating gross domestic product. To be more precise Gross fixed capital formation measures the net increase in fixed capital. Gross fixed capital formation includes spending on land improvements (Fences, ditches, drains, and so on); plant, machinery, and equipment purchases; the construction of roads, railways, private residential dwellings, and commercial and industrial buildings. Disposal of fixed assets is taken away from the total. Gross Fixed Capital Formation can be classified into gross private domestic investment and gross public domestic investment. The gross private domestic investment is equivalent to gross fixed capital formation plus net change in the level of inventories. The gross public investment includes investment by government and public enterprises. Economic theory as well as empirical experience confirm that the significant differences in the level of economic development and rates of economic growth among countries or in the same country over time are, to a great extent, interrelated with the differences that exist in the level and composition of the capital stock, Bakare (2011). Ideally, capital stock is build-up by the accumulation of capital assets regularly done. Therefore economists have for a long time used the estimate of capital formation as well as capital stock in their analysis of the results of productive activity. Estimate of the gross stock of capital assets and capital formation are frequently used in determining the magnitude of and changes in productive capacity. According to Al-Faki (2006), the capital market is a network of specialized financial institutions, series of mechanisms, process and infrastructure that in various ways, facilitate the bringing together of suppliers and users of medium to long-term capital for investment in developmental projects. 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 centre 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, DOI: 10.9790/487X-17118594

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