IMPACT OF CAPITAL MARKET ON THE PERFORMANCE OF QUOTED MANUFACTURING COMPANIES IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1       Background to the Study

The manufacturing sector consists of establishments that use mechanical or chemical processes to transform material or substances into new products. An establishment is usually at a single physical location and is often called a plant, factory, or mill. It ordinarily uses power-driven machines and equipment for handling materials. Its products may be finished products that consumers will purchase, such as an automobile or furniture, or they may be semi-finished goods for use by other manufacturers, such as parts for automobile engines or rolls of upholstery fabric. A manufacturing establishment may also assemble parts or perform blending operations. One goal of production is to consume as few inputs as possible to produce a quality output. It is pertinent to mention that the manufacturing sector of Nigeria has passed through five stages of development. These stages as identified by (Anyanwu, 1998). The first phase is pre-independence era, when manufacturing was limited to primary processing of raw materials for export. The second phase is post-colonial era of the 1960s characterized by more vigorous import-substitution. The third is the decade of the 1970s, which witnessed the advent of oil and the enormous resources it provided. The fourth phase is the decade of the 1980s that experienced dwindling oil revenue. Also the fifth phase is the pre- SAP era till date which led to near collapse of the Nigerian economy. A review of the manufacturing sector indicated that the sector has been performing below expectation, leading to decline in industry productivity. In fact, the manufacturing sector in Nigeria contributions just 4% of the Gross Domestic Product (GDP). It is disgusting to note that industries are closing up/have closed up shop.

Capital market is an integral part of the financial system that provides an efficient delivery mechanism for mobilization and allocation, management and distribution of long-term funds. It is a network of financial institutions and infrastructure that interact to mobilize and allocate long-term funds for the economy. The capital market is one important subset of the financial sector whose role is critical for economic growth and development. All instruments with maturities of more than one year are regarded as capital market instruments (Nzotta, 1999). There are two markets within the Nigeria capital market, which can be broadly classified into Primary Market and Secondary Market. The primary market is where new issues of securities or financial instrument are sold with the proceeds going to the issuer. While secondary market is where securities previously issued and held by investors are continuously traded between the current holders (seller) and the new investors (buyer). Capital market in any country is one of the major pillars of long-term economic growth and development. It is in recognition of this critical role of capital market on economic growth that the government of Nigeria has over years sought to develop and strengthen this market. From a modest start in 1977 as an off-shoot of the Lagos Stock Exchange, the Nigerian Stock Exchange (NSE) has grown in width, size and depth. According to CBN (2010), the value of the total annual market capitalization was N5.0 billion in 1981 and it maintained a steady increase up to 1996 when it was valued at N285.8 billion. After this year, there was a dip in the value for the two succeeding years and the market capitalization picked up. It attained its pick in 2007 when it was valued at N13, 294.6 billion. From available statistic (CBN, 2010), the number and value of deals have also increased. In 1981, the total number of deals was 10,199 valued at N304.8 million. The total number of deals was 256,523 valued at N28, 153.1 million the year 2000. The number and value of deals peaked in 2008 when the number of deals was 3,535,631 and valued at N1, 679,143.7 million. By the end of 2010, there were (ten) trading centers and most indicators of capital market development have shown remarkable growth and resilience.

Al-Faki (2006), noted that despite the fact that Nigeria’s capital market had experienced growth as indicated by growth of its performance indicators, the industrial sector (especially the manufacturing sector) growth has not been impressive. The manufacturing sector output has been low and has witnessed continuous decline in capacity utilization in spite of successive government’s efforts to promote industrial development in Nigeria. Thus, the overriding consideration in this study is to investigate the impact of capital market has had on the performance of quoted manufacturing companies. The focus will be to find out how well the capital market funds have been used to finance the quoted manufacturing companies. More specifically, how the capital market as impacted on the performance of the quoted manufacturing companies in Nigeria.

1.2       Statement of the Problem

The manufacturing sector is the backbone for economic advancement in any nation. This is because it is through the establishment of industries that a nation could produce most of the goods and services its people require. The manufacturing sector in Nigeria are faced with so many challenges has been listed by the Manufacturer Association of Nigeria (MAN) in business day, Monday 17 September 2012 militating against the growth of the sector, difficult and unfavourable operating environment due mainly to acute infrastructure deficiency in the nation, irregular supply of industrial fuels arising from epileptic operation of local refineries, high cost of alternative power supply to industries resulting in un-competitiveness of locally produced goods, death of skilled middle-level manpower, high cost of fund and unavailability of long term loan windows to support long-gestation investment, perennial security challenges confronting the country, particularly the increasing trend in terrorism, kidnapping and armed robbery, etc. Long-term fund which is the bane of the manufacturing sector could be achieved through an active capital market that mobilizes long term funds for the development of small and medium scale industries in Nigeria (Kwode, 2014). It is clear that the need for long term capital especially in the developing countries like Nigeria makes the capital market indispensable. The Nigeria capital market is still faced with a lot of challenges, lack of confidence on the part of investors, low level of market capitalization, leadership crisis, lack of accountability and transparency on the part of the regulatory bodies. Consequently, the Nigeria capital market is unable to effectively and efficiently discharge its fundamental role of mobilizing long term fund for the manufacturing sector and the economy in general.

1.3       Research Questions

This study provides answers to following questions:

        i.            What is the impact of market capitalization on the performance of quoted manufacturing companies in Nigeria?

      ii.            What is the effect of trading volume on the performance of quoted manufacturing companies in Nigeria?

    iii.            Evaluating the impact of all share price index on the performance of quoted manufacturing companies in Nigeria?

1.4       Justification for the Study

This research makes some significant contribution to the existing body of knowledge in the area of capital market and performance of quoted manufacturing companies. The study also is of significant benefit to the investors to know whether the manufacturing companies are performing and how well they are doing in the capital market, so to know whether to invest in them. It is the hope that the result of this study will be beneficial to both internal and external parties (i.e managers in maximizing investors return, owners in making an informed, Government in making favourable financing policies etc.) to improve on the GDP contribution by the manufacturing sector and also improve on employment rate once the sector is viable since the stake holders are interested in knowing the impact of such decisions on an organization performance. Also, the government and its agencies somehow benefit from this study because the study highlight the need from its findings necessary for the government to formulate more favorable financial and economic guidelines as the sector demands and sustain the operations of Nigerian Manufacturing firms, especially the potential firms yet to be quoted in the stock market and resultantly contributing to GDP of the nation which have been on the decline. Students and researchers who want to develop a future research on this topic also benefit from this study and it contribute to filling the gap of existing body of knowledge in accounting, finance and economics regarding impact of capital market on the performance of quoted manufacturing companies in Nigeria.

1.5       Objectives of the Study

The general objective of the study is to examine empirically the impact of the capital market on the performance of quoted manufacturing companies in Nigeria.

The specific objectives are:

        i.            to examine the impact of market capitalization on the performance of quoted manufacturing companies in Nigeria.

      ii.            to examine the effect of trading volume on the performance of quoted manufacturing companies in Nigeria.

    iii.            to evaluating the impact of all shares price index on the performance of quoted manufacturing companies in Nigeria.

1.6       Hypothesis of the Study

The study is guided by the following hypotheses:

Ho₁: there is no significant impact of the market capitalization on the performance of quoted manufacturing companies in Nigeria.

Ho₂: there is no significant effect of the trading volume on the performance of quoted manufacturing companies in Nigeria.

Ho₃: there is no significant impact of the all shares price index on the performance of quoted manufacturing companies in Nigeria.

1.7       Scope of the Study

The study evaluated the impact of capital market on the performance of quoted Manufacturing companies in Nigeria and it cover quoted manufacturing companies in Nigeria. A period of twenty-five years, from 1990 to 2014 was examined. Among this period actually witnessed a boom of financing activities by Nigerian manufacturing companies prior to the global financial crunch (2008 – 2009).

1.8       Definition of Terms

Capital Market: A market where buyers and sellers engage in trade of financial securities like bond, share etc.

Performance: The profitability of the manufacturing sector i.e how well or badly they are doing

Market Capitalization: This is the total market value of the shares outstanding of company

Quoted Company: A company whose shares can be bought or sold on the floor of stock exchange market.

Manufacturing Sector: it is one of the key players in the real sector of the economy. The business or industry for producing goods in large quantities in factories, etc.

Traded volume: the number of equities and bond traded in the stock market for a particular year.

All Share Index: the overall share performance of quoted companies both manufacturing and non-manufacturing computed on a daily basis.

Share: a part of the ownership of a company.

Company: a form of organizing a business, with a legal personality distinct from the individuals taking part in it.

Profitability: the amount in excess of the receipts after paying the cost and tax involved over a period of time especially one year.

1.9       Plan of the study

Chapter one consists of background to the study, statement of the problem, research questions, justification for the study, objective of the study, hypothesis of the study, scope of the study, definition of terms and plan of the study. Chapter two contains literature review, introduction, the conceptual framework which will consist of concept of capital market, overview of capital market in Nigeria, the manufacturing sector, the capital market and manufacturing sector in Nigeria, capital market and economic growth in Nigeria, challenges of the Nigeria capital market, recent development in the capital market and prospects of the Nigerian capital market, theoretical background, empirical evidences and the gap to be filled by this study. Chapter three have methodology, introduction, research design, population for the study, sampling techniques, method of data collection and method of data analysis. Chapter four is for data presentation, analysis and discussion of results. Chapter five spells out the summary, conclusions and recommendations and suggestion for further research.

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