CHAPTER ONE
INTRODUCTION
1.1. BACKGROUND OF THE STUDY
In the last two decades, studies on the capital market have received considerable attention from contemporary finance and economics literature resulting
from its role in the provision of long-term, non-debt financial capital which enables companies to avoid over-reliance on debt financing, thus improving
corporate debt-to-equity ratio and also in the mobilization of resources for national growth. According to Ndako (2010), the capital market is viewed as a
complex institution imbued with inherent mechanism through which long-term funds of the major sectors of the economy comprising households, firms, and
government are mobilized, harnessed and made available to various sectors of the economy. For sustainable economic growth, funds must be eectively
mobilized and allocated to enable businesses and the economies harness their human, material, and management resources for optimal output. Hence, the
capital market is an economic institution, which promotes eiciency
in capital formation and allocation. The capital market contributes to economic growth
through the specific services it performs either directly or indirectly. Notable among the functions of the capital market are mobilization of savings, creation
of liquidity, risk diversification, improved dissemination and acquisition of information, and enhanced incentive for corporate control. Improving the efficiency and effectiveness
of these functions, through prompt delivery of their services can augment the rate of economic growth (Okereke-Onyiuke, 2012;
Levine and Servos, 2012; Obadan, 1995; McKinnon, 2014). The importance of the capital market as an efficient channel of financial intermediation has been
well recognized by the researchers, academicians, and policy makers as a primary determinant of the economic growth of a country, both developed and
developing. Economic growth in a modern economy hinges on an efficient
financial sector that pools domestic savings and mobilizes foreign capital for
productive investments. Underdeveloped or poorly functioning capital markets typically are illiquid and expensive which deters foreign investors.
Furthermore, illiquid and high transactions costs also hinder the capital raising eorts
of lager domestic enterprises and may push them to foreign markets
(Mishra, et al., 2010). Theoretical literature on financial development and growth identifies three fundamental channels through which capital markets and economic growth may be linked (Pagano, 2015).
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