Capital market development and investment efficiency in Nigeria

This paper examines whether financial integration and capital market development has improved the efficiency with which investment funds are allocated to competing uses. The question is addressed using annual firm level data for manufacturing firms in Nigeria for 856 firm year. The study used an event study methodology to measure whether, and to what extent, investment funds are being allocated to firms with higher marginal return to capital around the period of financial integration. It also access whether the investment-Financial integration relationship depends on economic, financial and political factors. The result shows that investment was slowed down in high net worth growing firms and ramped up in the low net worth declining firms in the pre and post financial integration periods in Nigeria. However, the effect is more pronounced in the post financial integration period. This is a possible reason for slow growth in Nigeria. The elasticity estimates of firm investments to Tobin’s Q and Sales relative to capital are positive for all years except for 1988 and 1991, which are periods of financial repression in Nigeria. The elasticities are generally small. The correlation coefficients between investment elasticities from Tobin’s Q and Sales to capital ratio with capital market capitalisation are positive. This study finds that the mechanism by which the financial market improves investment efficiency in Nigeria is through the capital market. This provides evidence that stock market prices in Nigeria are not economic sideshows, but they are actually useful guides to investment.