Analysis of stock market development, financial deepening and economic growth nexus in Nigeria and South Africa

Purpose The purpose of this study is to estimate the impact of stock market development and financial deepening on economic growth in Nigeria and South Africa. Data were collected from the World Bank and the statistical bulletin of the Central Bank of Nigeria. Design/methodology/approach The autoregressive distributed lag (ARDL) model was used in the study to capture the short and long run relationships among the variables. Findings The results of the estimation for Nigeria showed that only total value of shares traded (TVT) have a statistical significant impact on economic growth in the short run, while market capitalization, private sector credit, turnover ratio (TNR) and broad money have insignificant impact on growth. In the long run however, TVT, broad money and TNR were the only variables that have a significant impact on growth. Stock market has a positive relationship with economic growth but it is more visible in emerging markets like Nigeria. The results for South Africa showed that only broad money have a statistically significant impact on growth in the short run while all other variables except TNR have a significant growth on growth in the long run. The error correction model results showed that the model adjusts to equilibrium in the short run. Thus, about 6% and 27% of the disequilibrium between the independent variables and the dependent variable is corrected each year for the Nigerian and South African economies respectively. Originality/value This paper is among the first to examine the impact of stock market development and financial deepening on economic growth in Nigeria and South Africa comparatively, while adopting the ARDL modeling approach. Hence, this study recommends that policymakers and monetary authorities should formulate policies that will improve the performance of the stock market and encourage more participation. This study emphasizes that the formulation of appropriate policies is not sufficient in itself; proper monitoring and implementation of these policies are instrumental to improving stock market performance and subsequently contributing to economic growth.