Impact Of Elections Results On The Performance Of The Nigerian Stock Market

ABSTRACT

This core intent of this study is to determine the effect of general elections results on the performance of stock markets in emerging economies. This is necessitated by the concern on whether financial markets are significantly impacted by political environment during elections. The study focused on three general elections in Nigeria; 2007, 2011 and 2015 general elections. The event study methodology was adopted and analysed secondary data collected from the Nigerian stock exchange for the periods of the 2007, 2011 and 2015 general election dates. The analysis of the cumulative abnormal returns (CAR) found that the 2007 and 2011 general elections were negatively significant which we suggest can be explained by the increase in market uncertainty due to the political uncertainty while the CAR for 2015 general election was found to be insignificant at 5% level of significance. Therefore, the research study concludes that general elections have significant impact on the performance of the stock market. The study recommends that stock market regulators should carefully study political events in the implementation of policies so as to protect the stock market against political risk during general elections and to boost investor confidence in the market. Also, investors should study the market in event of political elections so as to properly understand the market and ensure that their investment in the market yields a positive return.

TABLE OF CONTENTS

Title Page                                                                                                                                i

Declaration                                                                                                                              ii

Certification                                                                                                                            iii

Dedication                                                                                                                              iv

Acknowledgements                                                                                                                v

Table of Contents                                                                                                                   vi

List of Tables                                                                                                                          x

List of Figures                                                                                                                         xi

Abstract                                                                                                                                  xii

CHAPTER 1: INTRODUCTION

1.1       Background Information                                                                                            1

1.2       Statement of the Problem                                                                                            4

1.3       Objectives of the Study                                                                                               6        

1.4       Research Questions                                                                                                      6

1.5       Hypotheses                                                                                                                  6

1.6       Significance of the Study                                                                                            7

1.7        Scope of the Study                                                                                                    8

1.8       Limitation of the Study                                                                                              8

1.9   Operational Definition of Terms                                                                                      8

CHAPTER 2: LITERATURE REVIEW

2.1       Conceptual Framework                                                                                                11

2.1.1    Electoral system                                                                                                          13

2.1.2    2007 Nigerian national election                                                                                  14

2.1.3    2011 Nigerian national election                                                                                  15

2.1.4    2015 Nigerian national election                                                                                  15

2.1.5    Overview of the Nigerian stock exchange                                                                  16

2.1.6    The Growth of the Nigerian stock exchange                                                              16

2.1.7    Development in the Nigerian stock exchange                                                17

2.1.8    Contribution of the stock market to capital formation in Nigeria                              18

2.1.9    Nature of investment in stocks                                                                                   19

2.2       Theoretical Review                                                                                                     20

2.2.1    Efficient market hypothesis                                                                                        20

2.2.2   Criticism of efficient market hypothesis and behavioural finance                              22

2.2.3    Modern portfolio theory                                                                                             23

2.2.4    Uncertain information hypothesis                                                                               24

2.2.5    Rational expectation theory                                                                                        24

2.2.6    Political business cycle                                                                                                24

2.3       Empirical Review                                                                                                        26

2.3.1    Pre-election period and the stock market                                                                  34

2.3.2    The Nigerian stock market and shareholders expectation                                         35

2.3.3    Post-election period and the stock market                                                                  35

2.3.4    General elections and the stock market                                                                      36

2.3.5    Normal and abnormal returns                                                                         37

2.3.6.   General elections and money market performance                                                     38

2.3.7    Transition periods and foreign investment                                                                 39

2.3.8    Effect of political election on public and private investment                                     40

2.3.9    Politics and stock market volatility                                                                            41

2.3.10  Investor sentiment and the stock market                                                                    42

2.3.11  Summary of literature                                                                                                 43

2.3.12 Research gaps                                                                                                              44

CHAPTER 3: METHODOLOGY

3.1       Research Design                                                                                                        45

3.2       Area of Study                                                                                                                         45

3.3       Sources and Methods of Data Collection                                                                  45

3.4       Sample Selection                                                                                                        46

3.5       Technique of Data Analysis                                                                                       46

3.6       Models Specification                                                                                                  47

3.7       Description of Variables                                                                                            55

CHAPTER 4: DATA PRESENTATION AND RESULTS 

4.1       Introduction                                                                                                                56

4.2       Test of Hypothesis One                                                                                              57

4.3       Test of Hypothesis Two                                                                                               59

4.4       Test of Hypothesis Three                                                                                            60

4.5       Test of Hypothesis Four                                                                                             61

4.6.       Discussion                                                                                                                  64

CHAPTER 5: SUMMARY CONCLUSION AND RECOMMENDATIONS 

5.1     Summary                                                                                                                       67

5.2     Conclusions                                                                                                                   68

5.3     Recommendations                                                                                                        69

5.4       Suggestion for Further Studies                                                                                   69

5.5       Contribution to Knowledge                                                                                        70

REFERENCES                                                                                                                    71       

APPENDICES                                                                                                                      78

LIST OF TABLES

Table                                                                                                                                      Page

3.1: Variables used in the study                                                                                              55

4.1: sample companies listed in the Nigerian stock market                                                    56

4.2: Definition of events for the study                                                                                   57

4.3: Result of average abnormal returns and CAR for H₀₁                                                     58

4.4: Result of average abnormal returns and CAR for H₀₂                                                                      59

4.5: Result of average abnormal returns and CAR for H₀₃                                                                      60

4.6: Test for Arch Effect                                                                                                        62

4.7: GARCH (1,1)- Normal                                                                                                    63

LIST OF FIGURES

Figure                                                                                                                                     Page

1:         Illustration of the year to date (YTD) of industry sector performance in

the Nigerian stock market                                                                                           18

2:         Definition of the estimation period                                                                            47