Stock Market Liquidity and Capital Formation in Nigeria

Abstract

This study empirically examined the effect of stock market liquidity on capital formation in Nigeria. An ex-post facto research design was adopted while secondary data, which ranged from 1985 to 2022, were used. These data were sourced from the Central Bank of Nigeria (CBN) Statistical Bulletins and the Nigerian Exchange Group (NGX) fact book. The study is based on the financial intermediation theory and the efficient market hypothesis. Descriptive analysis, regression analysis, and unit root tests were employed, as well as the Bounds Auto Regressive Distributed Lag (ARDL) testing approach for evaluation. Post-estimation tests were also conducted to check the validity and reliability of the model. The results conclude that there is a positive and significant relationship between market capitalization and gross fixed capital formation in Nigeria, a positive and significant relationship between the turnover ratio and gross fixed capital formation in Nigeria, a negative and significant relationship between the total value traded ratio and gross fixed capital formation in Nigeria, and a positive and significant relationship between the all-share index and gross fixed capital formation in Nigeria. The study recommends that a reliable regulatory framework should be put in place by the government that could actively carry out the surveillance of the stock market. The study further recommends that policies focusing on promoting long-term investments, aligning stock market activity with productive sectors, deepening financial instruments for infrastructure financing, and ensuring regulatory frameworks support stability and long-term growth be implemented.