Stock market development: a reflection of governance regulatory framework in Nigeria

Fisayo Fagbemi,Opeoluwa Adeniyi Adeosun,Kehinde Mary Bello

doi:10.1108/jcms-07-2021-0022

Fisayo Fagbemi, Opeoluwa Adeniyi Adeosun + Show 1 more

Open Access

https://doi.org/10.1108/jcms-07-2021-0022

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Abstract

PurposeThe article examines the possible long-run and short-run impact of regulatory quality on stock market performance in Nigeria for 1996–2019 period.Design/methodology/approachThe study adopts autoregressive distributed lag (ARDL) bounds test and cointegrating regression techniques.FindingsFindings reveal that regulatory quality positively and significantly influences the performance of stock market, which strengthens the view that market-enhancing governance can engender an improvement in stock market performance. The study further demonstrates that quality of the regulatory environment is a critical component of market operations, since the improvement of the operation of stock market performance depends on appropriate policy measures, which could be the outcome of improved governance.Practical implicationsIt is suggested that, while improving the institutional environment is a challenge to regulators, there is need for strong and effective regulatory mechanism to enhance the development of stock market in the country.Originality/valueBased on the two competing hypotheses and limited attention, previous studies accorded the role of regulatory quality in the performance of stock market in the context of Nigeria. This study assessed the gap in the literature by taking the task of validating the impact of regulatory quality on stock market development.

Highlights

The quality of governance presents primal concerns for the viability of a business environment
Where SMKTt is the stock market performance indicators — market capitalization ratio (MRK) and Value trade ratio (VTR); REGt; represents regulatory quality, while Xt is a vector of some economic indicators that could affect stock market performance; t is the time dimension
Given that it has been empirically established that components of institutional quality could have an influence on the performance of stock market in any economy, evidence on the role of regulatory quality is in scarce report, especially in Nigeria’s context

Summary

Introduction

The quality of governance presents primal concerns for the viability of a business environment. Since ensuring proper surveillance of political activities and business operations, institutions play a central role in terms of facilitating the effectiveness of rules and regulations, and adherence to rule of law. According to World Bank (2020) report, for the attainment of higher economic performance, strengthening institutions is crucial. The report emphasizes that developing economies should strengthen their governance structures for proper functioning of their financial markets. The state of stock market in an economy is determined by government policies and the soundness of regulatory framework (Asongu, 2012). Viable institutions could advance the operation of rules and regulations for efficient resource mobilization and allocation, and engendering a sound business environment. Poor regulatory framework and inadequate supervision mechanisms could lead to

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