Abstract
This paper examines the relationship between Government fiscal policy measures and stock prices in Nigeria during the period 1985 – 2012. Employing OLS, co-integration, error correction mechanism (ECM), Granger Causality and impulse response and variance decomposition techniques on fiscal policy – stock prices model patterned after a multivariate regression, the study found a significant and negative impact of Public expenditure on stock prices, while Government Domestic Debt Outstanding exerts a significant and positive influence on stock prices. The study also reports a significant and positive relationship between Non-Oil Revenue and stock prices while the two-period and three-period lagged values of broad money supply have significant relationship with stock prices. The Granger causality tests reveal that Stock prices lead changes in Public Expenditure, Domestic Debt and Money Supply respectively while Non-Oil Revenue leads changes in stock prices. The results of both the IRF and VDC analysis reveal that own shocks represent the dominant source of variation in the forecast errors of the variables. The paper therefore recommends that appropriate fiscal policies should be designed and implemented on account of the significant and profound impact of fiscal policies on stock market prices.
Highlights
The controversy as to whether fiscal policy exerts any significant influence on stock market activities has been on the front burner of discourse among experts in behavioural finance
This paper set out to investigate the nature of the relationship between fiscal policy measures and stock prices in the Nigerian capital market during the period 1985-2012 as well as examining the direction of their relationship
The application of the parsimonious error correction mechanism (ECM) reports a significant relationship between fiscal policy variables and stock prices in the Nigerian capital market
Summary
The controversy as to whether fiscal policy exerts any significant influence on stock market activities has been on the front burner of discourse among experts in behavioural finance. Meek (1960), hypothesized that to encourage the growth or activities of capital markets the government should increase the availability of alternative sources of public finance, reduce tariffs in order to make the market more competitive and pursue economic stabilization policies. These policies, working together, could create an open competitive market that attracts entrepreneurs to invest in the capital market without fear of losing their investment due to unsound government fiscal policies. Tax and expenditure policies are examples of how the government attempt to control investment and indirectly the depth and breadth of capital market as well as stock prices
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