Regulatory institutional quality and long-run primary capital market development: the Nigerian case

The role of the financial regulator is significant in the development of its sector. This paper examines the impact of the Securities and Exchange Commission (SEC) on the development of the Nigerian primary capital market, using Granger-vector autoregression (VAR) framework for data from 1980 to 2013. The variables considered are market capitalisation, liquidity, financial literacy and regulatory quality. The short-run findings indicate that regulatory quality Granger-causes market capitalisation. Transaction cost also predicts market capitalisation and liquidity. Financial literacy predicts capitalisation and liquidity. Market capitalisation responds negatively to regulatory quality long run impulses, implying that an 'indifferent' regulation could be catastrophic for future primary market development. However, capital issuing responds positively to regulatory quality ten period innovations. Liquidity responds positively to financial literacy's innovation. A priori significant finding is that market capitalisation and liquidity do not drive capital issuing in the long-term. For policies, the paper recommends regulators to increase campaigns to deepen the understanding of issuers through financial literacy of potential issuers, promote the registration of more rating agencies and reduce transaction costs. Regulators should apply 'soft' listing requirements to encourage more firms to seek funds from primary capital market. Government should evolve strong market economy.