Using Nigeria aggregate level data for 26 years: 1986-2011, the study estimates the impact of financial liberalization on stock market efficiency in Nigeria. The study used the Generalised Least Square (GLS) to estimate the four hypotheses formulated for the study. The ratio of stock market capitalization to gross domestic product, ratio value of shares traded to gross domestic product, ratio of all share index to gross domestic product, and ratio of value of shares traded to market capitalization were adopted as the dependent variables, while the independent variable was financial liberalization (percentage in foreign equity ownership). The study also controlled for some macroeconomic variables such as exchange rate, inflation rate and interest rate that might impact on the dependent variables. The results showed that the regression coefficient for financial liberalization was negative and non-significant in predicting or promoting four proxies of stock market efficiency, which supports the preposition that financial liberalization does not transform or promote stock market efficiency. Based on the results, the study recommends inter alia: promotion of favourable macroeconomic environment; formulation of policies that will reduce the impact of speculative hot money, strengthening of the legal system, stronger transparency in terms of information disclosure, the need for the establishment of effective and efficient Dispute Resolution Mechanism, the urgent need to rethink the tenure of the market; among others.

1.1 Background of the Study
The issue of market efficiency, as espoused by Fama (1965, 1970), which posits that prices fully reflect available information has remained at the heart of financial economics literature. Lim and Brooks (2011), state that the efficient market hypothesis defines an efficient market as one in which new information is quickly and correctly reflected in its current security price. Generally, the argument is based on the assumption that at any given time, prices of stocks fully reflect all the available information related to them. This is the path toed by Marashdeh and Shrestha (2008), Maghyereh (2003), Bashir, Ilyas and Furrukh (2011), among others.

For the market to be efficient, the prices of stock must reflect company fundamentals, state of the economy and most importantly, the law of demand and supply, which can only come to fruition through liberalising the stock market (Kawakatsu and Morey, 1999; Waliullah, 2010). Proponents of this theory have documented extensive evidence to show that financial liberalization promotes stock market development (Ortiz, Cabello and Jesus, 2007). Against this background, the effects of financial liberalization on stock market efficiency has remained a core issue in finance literature, more so, considering efforts by governments especially in the developing countries to liberalize their financial markets in order to catch up with the developed countries on one hand and to integrate their economies to the global economy on the other. The impact of financial liberalization on the stock returns and volatility is an important issue for researchers, regulators and investors (Nazir, Khalid, Shakil and Ali, 2010).

An illustrative list of studies of the effects of financial liberalization on stock market efficiency includes those by Henry (2000) who found that stock market liberalization may reduce the liberalizing country’s cost of equity capital by allowing for risk sharing between domestic and foreign agents; Kim and Singal (2000) found that stock returns increase immediately after market opening without a concomitant increase in volatility; Bekaert, Harvey and Lundblad (2003) report that integration affects the functioning of the equity market, the cost of capital, the diversification ability of local participants, the level of prices, the business focus of local companies, and foreign capital flows while the empirical findings of Levine and Zervos (1998) show that stock markets tend to become larger, more liquid, more volatile, and more integrated following liberalization and Grabel (1995) states that financial liberalization induces increased asset price volatility. On his part, Miles (2002) reports that reforms has a statistically significant impact in almost three fifths of the emerging markets surveyed, but more often than not, the effect is actually to raise, rather than lower the volatility of stock returns. In this connection, therefore, the highly articulated view of Levine (2001) which states that international financial integration can promote economic development by encouraging improvements in the domestic financial system is worth noting.

Specifically, Bekaert and Harvey (1995) explain that markets are completely integrated if assets with the same risk have identical expected returns irrespective of the market. A prominent line of research suggests that financial development has a causal influence on economic growth (Ujunwa and Salami, 2010). However, Stigliz (2004) in his criticism of the International Monetary Fund (IMF) policy of pressuring countries into liberalizing their capital markets, reports that economists, particularly in developing countries, had long expressed doubts about the virtues of capital market liberalization.

The foregoing effects especially the aspects detailing the positive imparts of liberalization, may have formed part of the reasons why liberalization became a matter of choice in Nigeria in the 1980s. Financial liberalization which involves banking reforms, insurance reforms and stock market development, without doubt, could have significant effect on stock returns and volatility. Ojo and Adeusi (2012) state that in Nigeria, financial sector reform was a component of the Structural Adjustment Programme (SAP) which was introduced in 1986. They further state that some of the reforms created for the money market indirectly affected the capital market activities simultaneously. Quoting Nnanna, Englama and Odoko (2004), these reforms according to Ojo and Adeusi (2012) include deregulation of interest rates, exchange rate, entry/exit into the banking business, establishment of the Nigeria Deposit Insurance Corporation (NDIC), strengthening the regulatory and supervisory institutions, upward review of capital adequacy, sectorial credit guidelines, capital market deregulation and introduction of direct monetary policy instruments.

Opening of capital markets represents an important opportunity to attract the necessary foreign capital (Kim and Singal, 2000). Foreign capital in the nature of portfolio flows may take a different pattern when the market is made more open following liberalization. On the issue of regaining access to foreign capital by developing countries, Bekaert and Harvey (2003) argue that portfolio flows to developing countries (fixed income and equity) and foreign direct investment replaced commercial bank debt as the dominant sources of foreign capital. They argue further that portfolio flows to developing countries could not have happened without these countries embarking on a financial liberalization process, relaxing restrictions on foreign ownership of assets, and taking other measures to develop their capital markets, often in tandem with macroeconomic and trade reforms. Specifically, Nigeria was in dire economic crisis in the period preceding liberalization. Omotoye, Sharma, Ngassan, and Eseonu, (2006) are of the view that the oil glut of the mid-1980s exposed the fundamental weakness of the Nigerian economy and greatly intensified the country’s debt management problems. On their part, Omoleke, Salawu, and Hassan, (2010) point out that it is a trite fact that, deregulation and privatization in Nigeria are consequences of failure of the state owned enterprises. Also, Adeyemo and Salami (2008) see privatization as a strategy for reducing the size of government and transferring assets and service functions from public to private ownership and control.

According to Alabi, Onimisi and Enete (2010), the argument for economic reforms in Nigeria in the 1980/1990s could be attributed to several reasons among which were: the need for more money to fund imports, policy reactions towards combating the impending economic collapse, external shocks of foreign loans; the enterprises in Nigeria have found themselves in a state of perfidy, low performance and undoubted inefficiency.

Probably as a result of the foregoing, the Babangida government in 1986 applied for what was known as the IMF loan. As part of requirements for the loan, the IMF insisted on certain conditionalities which prescribed exchange rate depreciation, privatisation and liberalization. This resulted in a package that later became known as Structural Adjustment Programme (SAP). It could be argued that these conditionalities were prescribed as part of qualifications for the facility and also due to the need for greater integration of the Nigerian economy into the global economic system. Anyanwu (1992) argues that the IMF-World Bank economic policy packages embodied in President Babangida’s Structural Adjustment Programme (SAP) provided overt encouragement to the fostering of an unregulated, dependent capitalist development model, while allowing only a supportive role for the government in a refurbished economic environment of highly reduced government ownership and control of enterprises.

There is no doubt that these conditionalities were universal in terms of prescriptions for the economic ailments of developing and underdeveloped economies irrespective of backgrounds, structure and individual level of development even when generally classified as developing or underdeveloped. To this extent, Ekpo (1992) is of the opinion that the countries of West Africa continue to experience underdevelopment despite the economic growth of the early and late sixties. He added that the sustained crisis, evidenced in low productivity, high rates of inflation, high rates of unemployment, deterioration in standards of living, huge external debts, social and political chaos, etc, prompted virtually all the countries in the West African sub-region to implement, in one form or another, the typical International Monetary Fund (IMF) and World Bank adjustment programmes.

Proponents of these prescriptions can argue that the choice is anchored on the belief that globalisation increases economic integration of world economies which manifests in increased trade and investment. In the view of Zekos (2005), globalization is characterised by structural reforms such as trade and investment liberalization and increased trade and international investment flows promoting growth, altering the composition and geographical distribution of economic activities, stimulating competition and facilitate the international diffusion of technologies having significant effects, both positive and negative, for sustainable development. But the level of economic development and the point in the lifecycle of individual economies which could have formed the basis upon which prescriptions were made appears to have been inadvertently omitted. In the case of Nigeria, the economy was characterised by sustained fiscal imbalance and exposure to external shocks which brought about both domestic and external instability. In fact, economic deregulation in Nigeria was not a policy option during the oil boom period of the 1970/1980s as no evidence suggests that external influence on policy choices at that time was strong. The need to transmute from a planned to market economy, although, arose through the influence of the World Bank and IMF, impetus was added by thinking in the international arena due to what was seen as benefits of the free market system. Smith, Jefferis and Ryoos (2003) made a strong case for transition from planned to market economy by stating inter alia: “we believe success requires a psychological readjustment, a mind-shift from the failed assumptions of a decadent, centrally planned economy to those of a competitive, vigorous and.....

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