THE DYNAMICS OF EMERGING SECONDARY CAPITAL MARKET – A CASE STUDY OF N.S.E

The search for factors influencing prices of shares is one area of modern economic research that is being studied most intensively especially in view of recurring crashes in different capital markets. This study aims to establish factors that led to crash of prices of shares on the Nigerian Stock Exchange (NSE) in 2008 as well as determinant of such prices in the emerging capital market. The research is based on regression analysis, analytical review of financial statements of some of the Companies quoted on NSE, and a survey of randomly selected investors in the market. The regression analysis shows that prices of shares on NSE largely depend on returns on other investment options and dividends. It further shows that contrary to a priori expectation, prices of shares are inversely related to exchange rate, and notably, output growth. Analytical review of sampled financial statements shows that prices of shares responded to the related entities’ earnings report as contained in the financial statements. It further shows the need to look beyond just the figures. Survey analysis re-affirms a strong relationship between dividend payment by the entities listed on the NSE and their share prices. It however, shows that financial position of the entities is not a significant factor impacting prices of shares in the market. The general conclusions of this study are that prices of shares in the market responded mainly to returns on other investment options and dividend payments by the quoted entities. This realization led to manipulations of financial statements and declaration of dividends even when the true state of affairs of the entities did not support same. It was the widespread of this practice aided by the weak regulatory environment and speculative buying of shares by unsuspecting investors that led to eventual crash in the NSE in 2008.