The issue of whether capital market development has any direct impact on economic growth has/is still been debated in academic literature. Earlier research in this area of finance had emphasized the role of the banking sector in economic growth; however, the recent surge in capital markets activities with emerging markets like Nigeria accounting for a large amount of this boom has led to focus on the linkage between capital markets development and economic growth especially on its impact on the real sectors of these economies. The real sector of an economy is where goods and services are produced through the combined utilization of raw materials and other productive factors such as labour, land and capital and it comprises the agricultural, industrial, building and construction, and services sector of an economy. In Nigeria, despite the opportunities which the capital market provides through the provision of surplus funds, the growth of the real sector of the Nigerian economy has remained stunted. Problems such as the inaccessibility of funds by real sector firms from the capital market due to stringent listing requirements and conditionalities, lack of depth and breadth of the capital market to cater for the need of real sector firms among other challenges, have been attributed as major factors inhibiting the growth of the real sector of the Nigerian economy. It is against this background therefore, that this study sought to appraise and analyze the impact of the new issues market, market capitalization, turnover ratio and value of share traded ratio of the Nigerian capital market on real sector of the Nigerian economy. The study adopted the ex- post facto research design and annualized cross-sectional data for a 24-year period, 1987-2010, were collated from the Nigerian Stock Exchange Fact Books for the period. Four hypotheses were proposed and tested and descriptive statistics and graphs were also used to complement the regression results. The results from this study found that the new issues market of the Nigerian capital market has a positive and significant impact on agricultural output (coefficient of NIR = 0.04, t-value = 5.13; p = 0.00 < 0.05) but negative and significant on industrial output (coefficient of NIR = -0.05, t-value = -5.03; p = 0.00 < 0.05). Market capitalization has positive and significant impact on agricultural output (coefficient of Mcap = 0.01, t-value = 3.96; p = 0.00 < 0.05) but had negative and significant impact on industrial output (coefficient of Mcap = -0.01, t-value = -6.98; p = 0.00 < 0.05). Turnover ratio of the Nigerian capital market had positive and significant impact on agricultural output (coefficient of TVR = 0.68, t-value = 7.07; p = 0.00 < 0.05) but negative and significant impact on industrial output (coefficient of TVR = -0.59, t-value = -4.47; p = 0.00 < 0.05). And value of share traded ratio of the Nigerian capital market had positive and significant impact on agricultural output (coefficient of VSTR = 0.058, t-value = 5.55; p = 0.00 < 0.05) but negative and significant impact on industrial output (coefficient of VSTR = -0.0619, t-value = - 5.77; p = 0.00 < 0.05). The study, therefore, amongst others recommends that policies that will impact positively on the real sector, especially the agricultural and manufacturing subsectors of the Nigerian economy where it concerns funding, should be pursued with all the seriousness it deserves if Nigeria is to achieve her desire to be one of the top twenty economies in the world by the year 2020. Therefore, this study contributed, empirically to provide evidence on the impact of the capital market on the real sector of the Nigerian economy.

The issue of whether capital market development has any direct impact on economic growth has been debated in the academic literature. The early proponents of finance-led economic growth include Bagehort (1873), Schumpeter (1911) and Hicks (1969). Bagehort (1873) and Schumpeter (1911) argue strongly for the important role capital market development plays in promoting economic growth. They support their claim by arguing that the industrial revolution in England was the result of a functioning capital market that was instrumental in mobilizing and allocating long-term capital to the productive enterprises of the country. Their position was buttressed by Hick (1969), who argued that a well functioning banking system provides intermediation services to productive entrepreneurial activities that spur technological, innovative, and productive activities that increase real sector growth.

On the other hand, Robinson (1952) indicates that demand-pull initiatives from the private sector growth have the propensity to spur the financial sector to respond to financial or capital needs of the private sector. In her view, real sector developments (growth) and financial needs create the demand for a certain financial structure (equity versus debt) to cater to the needs of the private sector. Lucas (1988), in support of Robinson’s position, argues that the proponents of finance led growth exaggerate the impact of capital market development on real sector growth

However, ever since the pioneering contributions of Gurley and Shaw (1955, 1960, 1967), McKinnon (1973) and Shaw (1973), the relationship between financial development and economic growth led to the recent debates on the issue. Thus, numerous studies sprang up to deal with the different aspects of this relationship both on theoretical as well as on empirical levels. The broadest division of such works is between financial intermediaries (banks, insurance companies, and pension funds) and markets (bond and stock markets). It is said that a large part of an economy’s savings are intermediated towards productive investments through financial intermediaries and markets thus, since the rate of capital accumulation is a fundamental determinant of long-term growth, an efficient financial system is essential for an economy (see Garcia and Liu, 1999).

Earlier research in this area of finance emphasized the role of the banking sector in economic growth, however, since in the past decade when the world stock markets surged with emerging markets accounting for a large amount of this boom (Demirguc-Kunt and Levine (1996a), recent research, therefore, begun to focus on the linkages between the stock markets and economic development as new theoretical work began to show how stock market development might boost long-run economic growth with new empirical evidence supporting this view that stock market development plays an important role in predicting future economic growth (see, Demirguc-Kunt and Levine, 1996a; Singh, 1997; Levine and Zervos, 1998).

Beginning from the 1990s, these empirical literatures illustrated the importance of financial sector development for economic growth, however, despite this growing consensus, it could be seen that the link between finance and growth in cross-country panel data has weakened considerably over time. At the very time that financial sector liberalization spread around the world, the influence of financial sector development on economic growth has diminished (see, Rousseau and Wachtel, 2007). Thus, the strongest elements of the modern economists’ canon are that financial sector development has a significant impact on economic growth. No wonder, a generation ago, economists like Goldsmith (1969) saw the relationship and gave attention to the benefits of financial structure development and financial liberalization and McKinnon (1991) contributed by agreeing that the widespread flows of saving and investment should be voluntary and significantly decentralized in an open capital market close to equilibrium interest rates.

However, the seminal empirical work that established the growth-finance link is King and Levine (1993), which extended the cross-country framework introduced in Barro (1991) by

adding financial variables such as the ratios of liquid liabilities or claims on the private sector to gross domestic product (GDP) to the standard growth regression. They found a robust, positive, and statistically significant relationship between initial financial conditions and subsequent growth in real per capita incomes for a cross-section of about 80 countries. In the subsequent decade numerous empirical studies expanded upon this, using both cross-country and panel data sets for the post-1960 period (see Levine, 1997; Levine, 2005; Temple, 1999).

Most existing literature on relationship between the capital market and the economy has focused on the contributions of the financial intermediaries to economic growth (World Bank (1989), in fact, Levine (1997) and Liu (1998) and numerous empirical tests have shown that financial variables have important impact on economic growth. However, recently the emphasis increasingly shifted to stock market indicators due to the increasing role of financial markets in different economies.

For example, Atje and Jovanovic (1993) tested the hypothesis that the stock markets have a positive impact on growth performance. They find significant correlations between economic growth and the value of stock market trading divided by GDP for 40 countries over the period 1980-88 similarly, Levine and Zervos (1996, 1998) and Singh (1997) show that stock market development is positively and robustly associated with long-run economic growth.

In addition, using cross-country data for 47 countries from 1976-93, Levine and Zervos (1998) find that stock market liquidity is positively and significantly correlated with current and future rates of economic growth, even after controlling for economic and political factors. They also find that measures of both stock market liquidity and banking development significantly predict future rates of growth. They, therefore, conclude that stock markets provide important but different financial services from banks.

Furthermore, using data from 44 industrial and developing countries from 1976 to 1993, Demirguc-Kunt and Levine (1996a) investigate the relationships between stock market development and financial intermediary development. They find that countries with better-developed stock markets also have better-developed financial intermediaries. Thus, they conclude that stock market development goes hand-in-hand with financial intermediary development.

Existing models suggest that stock market development is a multifaceted concept, involving issues of market size, liquidity, volatility, concentration, integration with world capital markets, and institutional development. Using data on 44 developed and emerging markets from 1976 to 1993, Demirguc-Kunt and Levine (1996a) find that large stock markets are more liquid, less volatile, and more internationally integrated than smaller markets. Furthermore, institutionally developed markets with strong information disclosure laws, international accounting standards, and unrestricted capital flows are larger with more liquid markets.

Theory also points out a rich array of channels through which the stock markets such as market size, liquidity, integration with world capital markets, and volatility may be linked to economic growth. For example, Pagano (1993) shows the increased risk-sharing benefits from larger stock market size through market externalities, while Levine (1991) and Bencivenga, Smith, and Starr (1996) show that stock markets may affect economic activity through the creation of liquidity. Similarly, Devereux and Smith (1994) and Obstfeld (1994) show that risk diversification through internationally integrated stock markets is another vehicle through which the stock markets can affect economic growth.

Besides stock market size, liquidity, and integration with world capital markets, theorists have examined stock return volatility. For example DeLong et al (1989) argues that excess volatility in the stock market can hinder investment, and therefore growth. Thus, though, it is now well recognized that financial development is crucial for economic growth, however, the relationship can go the other direction. In other words, economic growth can also promote financial development. Recent literature on growth deals with this causal relationship along three lines: financial deepening stimulates economic growth; economic growth promotes the development of the financial sector; and a circular relationship that financial development and economic growth simultaneously affect each other (see Garcia and Liu, 1999).

From the above therefore, the school of thought that says financial development causes economic growth argue that financial development has a causal influence on economic growth. That is, deliberate creation of financial institutions and markets increases the supply of financial services. The financial sector increases savings, and allocates them to more productive investments, thereby financial development can stimulate economic growth (see, McKinnon, 1973; Shaw, 1973; King and Levine (1993).....

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