FINANCIAL MARKET FRICTIONS, FOREIGN PORTFOLIO INVESTMENT AND NIGERIAN STOCK MARKET DEVELOPMENT

The study examines the effect of financial market frictions and foreign portfolio investment on stock market development in Nigeria from 1981 to 2023 is examined. The time series data of the variables of interest were sourced from the Central Bank of Nigeria Statistical Bulletin (2024). The error correction model and the multivariate ordinary least squares regression methods were utilized in the evaluation of the two models (Market Size and Total Value Traded) specified in the study, and the data were estimated with the aid of Eviews econometric statistical package. The study finds that transaction costs and foreign portfolio investment inflows significantly impacted stock market development in Model 1 in the short-run, whereas capital gain tax rate, dividend tax rate, foreign portfolio investment, lagged transaction cost, lagged capital gain tax, and lagged foreign portfolio investment significantly impacted stock market development in Model 2 in the short-run. In addition, capital gain tax rate significantly impacted stock market development irrespective of the measure of stock market development used in the long-run, whereas inflation rate (control variable) significantly impacted stock market development when market capitalization is used as a proxy for stock market development. Furthermore, regulation (monetary policy rate) has no significant effect on Nigeria’s stock market development in both the short-run, irrespective of the stock market development measure used. This study concludes that financial market frictions and foreign portfolio investment variables considered in the model are significant determinants of stock market development in Nigeria. We recommend that operators and investors in the stock market should use FinTech to reduce market transaction costs, reduce the present 10% capital gain tax rate and dividend tax rate to 5%, and implement policies that encourage foreign portfolio investment inflow into Nigeria.