The Investment Performance of Common Stocks in Nigeria

Abstract

From the mid-1990s, the Nigerian Stock Exchange (NSE) has witnessed remarkable growth mainly due to privatization, new minimum capital requirements, improvements in market infrastructure, amongst a host of other factors. The vast potential of the nation’s secondary market is clearly indicated in its high rating by the International Finance Corporation (IFC) and Standard & Poors with respect to investment returns in dollar terms. Despite the growth in market capitalization, it is noted that when measured as a percentage of the Gross Domestic Product (GDP), it is still quite low. The investment performance of capital market securities should enhance the contribution of the capital market to economic development. This study investigates the investment performance of common stocks in Nigeria. In particular, this study examines the empirical conformity of some finance theories in Nigeria since most of such evidence are based on developed markets and evidence on emerging markets like Nigeria remains scanty. Secondary data, obtained from official sources, were utilized. Employing correlation and regression analyses, this study confirms the Modigliani-Miller (MM) capital structure irrelevance theorem, information content of dividends’ hypothesis, stock returns-systematic factors relation, and inflation-hedging capacity of common stocks. However, the Capital Asset Pricing Model (CAPM) and Price Earnings (P/E) Ratio- Growth relation lack strong empirical support. The implications of these findings are discussed. For instance, the “irrelevance result” and the “information content result” imply that chief finance officers should devote more effort on investment opportunities rather than seeking for opportunistic financing, and follow liberal dividend distribution policy to satisfy investors’ preference for regular income and resolve perceived uncertainty in the macroeconomy. Common stocks are effective hedgers against expected inflation but poor hedgers against unanticipated inflation which is the more significant component of inflation in Nigeria.