International Journal of Management Science, Volume 3, Number 2, 2011

International Journal of Management Science, Volume 3, Number 2, 2011 GOVERNMENT AND I!\'DUSTRIAL SECURITIES AND MARKET CAPITALIZATION IN THE NIGERIAN STOCK EXCHANGE MARKET: A REGRESSION ANALYSIS Stella Ifeoma Madueme Department of Economics University of Nigeria, Nsukka, Enugu state, Nigeria. ABSTRACT This empirical investigation seeks to find out the impact of government and industrial securities on market capitalization in the Nigerian Stock Exchange from 1980 to 2008. It seeks to unravel the trends in value of transactions in government and industrial securities, the trends in turnover ratio of both securities and the implication for private investment. Time series data were collected from archival sources and data are analyzed using graphs and regression analysis. Results obtained reveal that industrial stocks were more attractive to private investors than government stocks. They impacted more on market capitalization than government stocks over the selected years. In addition market turnover ratios has been on a steady decrease implying reduction in investment in both sectors since 2007. The recommendations are more government policies to achieve a greater balance ill private investment between industrial and government stocks and higher levels of market turnover in both sectors. One of such policies will centre on making government stocks more attractive in order to attract greater private investment and higher market capitalization values for the Nigerian stock market. INTRODUCTION AND LITERATURE REVIEW Market capitalization is conceptualized as the total market value of the paid up capital of a company. It is the value of share price multiplied by total outstanding shares. The size of market capitalization is determined by the rate of investment. Various theories have been propounded on factors influencing investment in industrial and government stocks. According to the Classical economists, the rate of interest is the major determinant of investment. Hence profit maximizing firms and private investors invest when the rate of return of the investment exceeds the market rate of interest. Another theory that tries to explain investment behavior is the accelerator theory. This theory upholds the view that the present level of investment 0)" individuals and firms is determined by past changes in the level of national income. Some other views by researchers argue that levels of profits of firms impact positively on investment behavior. Hence.ncrcesed profits of firms boosts investment confidence and positively motivate investors to put in funds into firms that record consistent high profits. Another argument is based on government policy as a major determinant of investment behavior. Government policies that reduce profitability of firms through taxes and other means reduce private investment spending which is referred to as the crowding out effect. Various researchers have worked on issues relating to market capitalization and share price movements. Suiliaman, Adnan and Adnan (2009) worked on the impact of macroeconomic variables on stock prices. Their focus of interest was the Karachi stock exchange. According to them, the stock market is important lor it mobilizes domestic resources and channels them to productive investments. Hence capital markets are seen by them as key elements in modern market based economic system as they serve as the channel for the flow of long term financial resources from savers of capital to borrowers of capital. Their empirical investigation tried to find the relationship between macroeconomic variables and prices of shares in Karachi stock exchange. They used variables such as gross fixed capital formation, broad money, wholesale price index, exchange reserve, foreign exchange rate which were compiled from 1986 to 2006. Their results show that internal factors such as increased production and capital formation does not affect stock prices significantly. Significant impacts were discovered to come from external factors such as exchange rate and foreign reserves. Robert (2008) worked on the relationship between macroeconomic variables and stock prices in China, Russia, Brazil and India. He discovered that domestic factors had more influence than oil prices and exchange rates. Song (2000) used Vector Auto Regression model to study fluctuations in the Asian stock market. His results reveal that the Asian stock market was highly responsive to oil prices and inflationary pressures. Desislava (2005) in his work worked on the relationship between policy, exchange rate and stock prices while Shefali and Balwinder (2007) looked at the relationships between share prices and macroeconomics variables. He discovered that stock prices were affected by exchange rate depreciation. Other researchers such as Lee (1992) tried to find out the causal relationships among stock returns, interest

Government and Industrial Securities and Marker Capitalization in the Nigerian Stock Exchange Market: A Regression Analysis rates, real acnvity and inflation. A somewhat similar work was also done in Brazil by Chatrati and Sanvicente C:~002) on inflation. output and stock prices. Nishat and Saghir (2004) in their empirical work studied the stock market and sayings and development of the economy of Pakistan. They worked on hundred index price from 1974 to 2000. They discovered that inflation and industrial production index does not Granger influence stock prices. They also conducted unit root test for the stationarity of data.. A synthesis of these works reveal a conspicuous absence of works on trends in industrial and government stocks in Nigeria and their turnover ratios. There is also the absence of works on their impact on market capitalization which this empirical investigation is focussed upon to unravel. In line with the foregoing, the following research objectives and hypotheses are formulated to guide the study: Research objectives The following research objectives guided the study: I. To show the trend of transactions of government securities from 1980 to 2008 2. To show the trend of transactions in industrial securities from 1980 to 2008 3. To determine the impact of industrial securities on market capitalization from 1980 to 2008 4. To determine the impact of government securities on market capitalization from 1980 to 2008 5. To determine which security has greater impacts on market capitalization and hence are best suited for private investment G. To show the trend in turnover ratio of both securities from 1980 to 2008 The following hypotheses are formulated to guide the study HOI: Transactions in government securities have significant impact on market capitalization from 1980 to 20(18 H02: Transactions in industrial securities have significant impact on market capitalization from 1980 to 2008 H03: Industrial securities have greater impact on market capitalization than government securities from 1980 to 2003 METHODOLOGY Time series data was collected from publication of the Nigerian Stock Exchange from 1980 to 2008. Data are presented in tables and graphs. Trends in the value of transactions in both government and industrial securities were ana lysed using graphs while impact analysis of securities on market capitalization are analysed using regression analysis. Data collected with respect to trends for government and industrial stocks and market turnover ratios are presented in Fig. I to 3 as follows: Fig. I shows the trend in Government securities from 1980 to 2008. The response by investors to government stocks was quite low and relatively the same from 1980 to 200 I judging from the flatness of the slope of the line graph. The starting point of trend values were also lower than 1000 from Fig. I. The graph however moved upwards between 2000 to 2003 and has a sharp dip by 2004. It increased to its highest level by 2006 and unfortunately has been decreasing steadily to very low levels by 2008. This implies consistent loss of confidence in government stocks which is not encouraging. Fig.2 shows the trend values of investments in industrial stocks. It is evident that response by investors to industrial stocks was relatively stable from 1980 to 2000. The trend values are much higher than those for government stocks in fig. 1 showing greater preference of industrial stock than government stocks. The trend began to go up after year 2000 steadily to its highest peak by year 2007. It has unfortunately been declining steadily since then which could be attributed to the global economic financial crisis. Fig. 3 shows the market turnover for industrial and government stocks. The market turnover decreased with slight ripples of booms from 1980 to 1992. From 1992 to 1995 the market got to its worst turnover levels implying very low levels of investment compared to other periods. However the market began to recover though not steadily as shown in Fig, 2 after 1995. It moved up to its peak by 2007 before it began to witness a steady decline since then showing decline in investment for both sectors. The data for securities transactions, market capitalization and turnover ratio and results of data analysis are presented in Tables I to 3 as follows: 2

---- - --- -_. -- International Journal of Management Science, Volume 3, Number 2, 2011 Table I: Securities transactions, market capitalization and turnover ratio YearITGS -IIDS-----ivT----- -IMCGS--'-MCIO-S- -TMC -- - ---irl ---.~ - --1-'--- ----- ----- ----- -- --- - -- - --' 1980,503.4 18.6 512 12766 1698 4464 11.5! I. t 1981'326 16.1 332.1 13059.9 1916.9 4976.8 '6.7: - - -- - r - - - - --,. 1982 206.6 :8.3 214.8.3048.9 1976.8 4025.7 :5.3 I 1983l~8~~?_.r1-3 ~='39~.~~~J~}45~2---2222-:-8 - --. _jl~~_~_=_=~6.9 I 19841402.8 115.4 ;418.2!2936.2 2578.7 15514.9 :7.6! :-::-1'-- -------~-- -. T::;---------- -- ----- - -------.!!~~2~-8.:..8-1123.0 ~~~.[1~~36.~ 313~:.?._~6~_?~_J?.:~.J 1986,470.4,21.9 1492.3 2698.0 :4096.8 6794.8 i7.3! ----T ---. -- -- -.---.~--------- - -------- -------.- --- -.--. --1 1987i307.9 140.1 1348.0 14240.6 '4057.0 j8297.6 :4.2' -----1-- ----1 --- -----------;-- ---- - --1-------- - -r--- ---- --- - - --- 19881104.9 32.7 i137.6 4538.5,5482.3 110020.8!1.4 --~'-----I-:- -------.-:----- - -r-----:;-~' ---" -- -r--------, ---- 1989,462.0 1)9.6 1)21.6 4228..) 8620..),12848.6 i4.1 199-Q1l56~4-1109.1-- --~E;5~--13431.3-12927.I--~6358~4--iIJ;--1 'i99j:4-2.7-r9i-s- -----:136.2- --1328-i~8----198-~l3.2 -- -- 23i-25.o -----jo.6-j ~92'73.8--r239f----~31I5---!3i4~}--~28~-26} _~ - 31-272h- -I~l 199349.7 1352.6 A02.3!3551.3 43884.8 47436.1 0.8! - -- -- 1- ------- -----.-- - -- - - --,-- --- -- - - - - 199414.7 1555.0 '569.7 13196.0 63172.0 66368.0 0.9! ~- - --r-----------.l'---------- ------- -. J 1995'- 1838.8 1838.8 3181.8 177123.3 180305.1 1.0 i - -- ---r --- ---- -._..-'-- ----------.--------:----- 1996 90.0 16972.7 7062.7 13037.3 282778.5 285815.8,2.5! 199_~1140~J 1-09-32.?~-U~?_2.0 g-s7} ~.~13~~J ~-r?~i~3=~~:279?76j-_-=~-8~ 1998 15.6 r13556.8 13572.3 12660.2 259857.2,262517.3 15.2 j _ -- _'1' - - - --- - - - c - ----- - -~ - - -- '- - - -' -- -- I 19990.8. 114026.6 14027.4 12443.3. 1297597.8 300041.1 1 4.7 J 2000 i~t- --I:i8l465-28154.6--!2131.3----,470158.7--;n2290~O-r6.ol ~- --- --. ---- -- - - 1 -- ----- ---.- -- ----- - --.2001-r~~-..J?-2.6J3~- 57~3?..:~. ~~~9.:~ 6S~p2.1 6_6~5_~I.~.-l~~J 2002 777.3 159311.3,60088.6!I2711.1 :752264.7 764975.8!7.9 'I 2003;6547.o[!l41-s6.0 - ji2-07c)3.0[25-211~1---!\ 334063~ 11359274.2- [8.'9 2004-i2026.6-r223794~O--1225820~6--1178144.4---!\934-4052- --i2112549:6t10:il 200518049.2r25488o~6i262929.il36547o.0-f2534592~1 ';29000-621-.1[9-:-1--, 2006lf665A r4e;s588.4 -f470253~8-r8888so.o-!4232063.3--[5-120943.3 19.2- io!l.7 L'-:-[2086294:6120 862-9'4:6j2976578.4ji03I8006. 5~fJ3~94584.9 05.71 ~00811.0 ~~13.S 1743114.5 r2963241.4 111261775.1;1~2_5~16.5JS.2 Source: Nigerian Stock Exchange Note: TGS = Total transactions in government securities IDS Total transactions in industrial securities TVT Total transactions in government and industrial securities MCGS = Market capitalization of government securities MClDS= Market capitalization of industrial securities TMC = Total market capitalization of government and industrial TR = Turnover ratio = TVT as % oftmc securities 3

Government and Industrial Securities and Market Capitalization in the Nigerian Stock Exchange Market: A Regression Analysis Table 2: Result of regression analysis of the impact of transactions in industrial and government securities on market capitalization Dependent Variable: TMC Method: Least Squares Sample: 1980 2008 Included observations: 27 Excluded observations: 2 Variable Coefficient Std. Error t-statistic Probability. TGS IGS 1639138 15.86444 362.9046 4.111890 4.516719 0.0001 3.858186 0.0007 R squared 0.064-+936 Mean dependent variable 2040831 Adjusted R squared 0.651534 S.D. dependent variable 6092376. S.E.ofregression 3596393. Akaike info criterion 33.09995 Sum squared resid 3.23E+14 Schwarz criterion 33.19594 Log likelihood -444.8493 Durbin- Watson stat 2.318025 EQUATION LS TMC TGS IDS Estimation Equation: TMC = C(1)*TGS + C(2)*IDS Substituted Coefficients: TMe = 1639.138217*TGS + 15.86443586*IDS Table 3:Ramsey RESET Test for stability of the model Dependent Method: Sample: Included Excluded Variable: Least 1980 observations: observations: Variable Coefficient Std. Error t-statistic TR Squares 2008 27 2 Probability. TGS IDS 1639138 15.86444 362.9046 4.111890 4.516719 3.858186 0.0001 0.0007 R squared 0.0644936 Mean dependent variable 2040831 Adjusted R squared 0.651534 S.D. dependent variable 6092376. S.E.ofregression 3596393. Akaike info criterion 33.09995 Sum squared resid 3.23E+14 Schwarz criterion 33.19594 Log likelihood -444.8493 Durbin- Watson stat 2.318025 Data from table 2 shows the result of the regression analysis on the impact of government and industrial stocks on total market capitalisation as the dependent variable. The stabi Iity of the model was tested using the Ramsey Reset test. The value obtained for the Durbin Watson statistics according to Table 3 is 2.31 which is slightly higher than 2.0 This shows that the model did not give a spurious result. Results obtained according to table 2 shows that one unit of total government securities increased total market capitalisation by 6% if R squared is multiplied by 100 since the R squared value is 0.0644938. The implication is that hypothesis one will be rejected which states that transactions in government securities have significant impact on market capitalization from 1980 to 2008 On the other hand one unit of total industrial stocks increased total market capitalisation by 65% since the R squared is 0.651534. Hence this will lead to the acceptance of the second null hypothesis which states that transactions in industrial securities have significant impact on market capitalization from 1980 to 2008. Since the industrial stock is able to increased 4

International Journal of Management Science, Volume 3, Number 2, 2011 R squared by 65%, it shows that transactions in industrial stocks have more positive impact in increasing market capitalisation. This implies that investors respond more to transactions in industrial stocks are more than government stocks. Hence the third null hypothesis is upheld which states that industrial securities have greater impact on market capitalization than government securities from 1980 to 2008. SUMMARY AND CONCLUSION This empirical study has tried to show the impact of government and industrial stocks on market capitalisation in the Nigerian Stock Exchange from 1980 to 2008. It shows trends of transactions in government and industrial securities and in the turnover ratio of both securities which has great implications for private investment. Time series data were collected from archival sources and data are analysed using graphs and regression analysis. Results obtained reveal that industrial stocks impacted more on market capitalization than government stocks over the selected years. In addition market turnover ratios has been on a steady decrease implying reduction in investment in both sectors since 2007. RECOMMENDA TI ONS The recommendations of the study are with respect to the fact that more government policies are necessary to achieve a greater balance in private investment between industrial and government stocks and higher levels of market turnover in both sectors. Government stocks needs to be made more attractive for example by making such industries more viable in order to increase investor confidence hence attracting greater private investment for the Nigerian stock market. REFERENCES Chatrati, B. And Sanvicente, A (2002) Inflation, output and stock prices. Evidence from Brazil. Journal of Applied Business Research. 18, 61-76 Desislava, D. (2005) The relationship between exchange rates and stock prices studied In multivariate model. Issues In Political economy Lee, B (1992) Causal relationships among stock returns, interest rates, real activity and inflation. Journal of Finance. 47, 1591-1603 Nishat, M and Saghir, M (2004) The slack market and Pakistan economy, Savings and Development. 15: 131-145 Robert G (2008) Effect of macroeconomic variables on stock market returns for four emerging economies: Brazil, Russia, India and China. International Finance and Economic journal. Shefali Sand Balminder S. (2007) Share prices and macro economics variables in India. Arja Vijnana Song, Z (1997) Macroeconomics determinants in stock return and volatility. Managerial Economics journal Suiliaman, D., Muhammad, Hudsain, A and Adnan, A (2009) Impact of macroeconomics variables on stock prices: Empirical evidence from Karachi Stock Exchange. European Journal of Scientific Research. 96-103 5