FINANCIAL MARKET PERFORMANCE AND FOREIGN PORTFOLIO INFLOWS TO NIGERIA: AUTOREGRESSIVE DISTRIBUTIVE LAG APPROACH

This study examined the relationship between financial market performance and foreign portfolio investment in Nigeria. The study specifically assessed whether there is a long run and short run causal relationship running from financial market performance to foreign portfolio investment in Nigeria. Financial market performance was measured using stock market performance, stock market liquidity and total new issues. The data for the study were source from the CBN statistical bulletin for the period 1984 to 2015. The exploratory design was combined with the ex-post facto research design; the data collection method was desk survey. The study used the Autoregressive Distributive Lag (ARDL) technique for data analysis. Findings from the analyses showed that financial market performance has no long run causal relationship with foreign portfolio investment in Nigeria. Also, stock market performance and stock market liquidity have no short run causal relationship with foreign portfolio investment in Nigeria. Lastly, total new issue has a short run causal relationship with foreign portfolio investment in Nigeria. The study on the basis of these findings recommends that stock market regulators should through conscious enlightenment campaigns encourage more domestic participation in the market to enhance the market performance, deepening and growth as this will strengthen its long run causality with FPI. Lastly, stock market regulators should through conscious risk reduction policies formulation and implementation reduce the riskiness of investing in the stock market to increase transactions and liquidity in the stock market, boost the rate of turnover to investors as this will attract foreign portfolio investors to the Nigerian financial market.


Introduction
The need to augment the saving-investment gap has given rise to the high demand for foreign capital in Nigeria. Foreign capital could be seen as the capital resources (either in form of cash, financial instruments or equipments) owned by a country other than the receiving country. It is the financial instruments, cash, equipments, skills and benefits granted to or invested in a country other than the originating country. Foreign capital could flow into a country either as foreign direct investment (FDI), foreign portfolio investment (FPI), commercial loans or transfers (TRF) (Jeffrey & Spaulding, 2005).
The composition of foreign capital inflow to developing countries in general and Nigeria in particular has shifted from commercial loans to foreign direct investment (FDI) and portfolio investment (Ndem, Okoronkwo & Nwamuo, 2014). Foreign portfolio investment as an international capital flow comprises of transfers and financial assets such as stocks or bonds. It occurs when investors purchase non-controlling interest in foreign companies or buys foreign corporate or government bonds, short term securities or notes (Ekeocha, Ekeocha, Victor & Onyema, 2012). The desire by foreign firms, governments and individuals to explore their comparative advantage has necessitated international capital flows. Therefore, foreigners seeking to maximize their earnings, move their accumulated foreign assets to countries where they will be more productive. Hence, it is the productivity of capital that facilitates international investments.
Foreign capital plays key roles in enhancing investment and facilitating macroeconomic goals attainment. Foreign investment create employment; provides knowledge and skills transfer in the area of management and technology; facilitates local firms' access to international markets and finance; enhances international trade integration; facilitates human capital development; provides avenues for risk and product diversification; encourages favourable competition among businesses and increases product diversity (Ngowi, 2001; Nwankwo, Ademola & Kehinde, 2013 and Adaramola & Obisesan, 2015).
The flow of foreign capital is highly dependent on the functioning of the financial market. One major aspect of the financial market that triggers investment is the stock market. The stock market enhances investment opportunities of the investors by providing avenues for the sale of securities when the need for cash/liquidity arises and enables investors to alter their choice of asset portfolio (Nwosa, 2015). From the business point of view, the stock market provides access to long term finance at a reduced cost (Dailami & Aktin, 1990;Kohli, 2003) and enable firms to undertake certain very-long term investments which seldom occur due to savers unwillingness to tie-up their investment for a long time (Adenuga, 2011;Greenwood & Smith, 1996).
The existence of a well-organized and liquid stock market is a potent incentive to foreign investors which facilitates inflows of foreign capital (Stiglitz, 1985). The high performance of the stock market in terms of increased volume of market capitalization, turnover ratio and all share price index equally serve as factors capable of pulling capital flows into the capital market of an economy (Ötker-Robe, Polański, Top & Vávra, 2007). This study is meant to examine the impact of financial market development on capital flows in Nigeria.  The operational efficiency of the Nigerian financial market has been seriously hindered by several economic challenges in Nigeria, resulting in the inability of the market to actively mobilize idle funds to finance domestic investments as well as attract foreign capital to Nigeria. This results in low level of transactions in the Nigerian capital market, leading to the inability of firms to sufficiently mobilize long term funds to finance their expansion and/or modernization of technologies. These, coupled with the unstable and risky conditions that characterized the Nigerian investment environment have reduced the liquidity, capitalization and dealings of the Nigerian capital market. Given this scenario, This study is meant to examine the impact of financial market development on foreign capital flows to Nigeria.

Objectives of the Study
The major objective of this study was to examine the impact of financial market development on foreign portfolio inflows in Nigeria. The specific objectives were: 1) To examine the impact of stock market performance on foreign portfolio investment inflows to Nigeria; 2) To ascertain the impact of stock market liquidity on foreign portfolio investment inflows to Nigeria; 3) To assess the impact of total new issues on foreign portfolio investment inflows to Nigeria.
The remainder of the paper is organized into four sections. Following section one is section two which deals with the literature review and theoretical framework, section three handles the research methodology. Section four shall present the empirical data for analyses and testing and finally, in section five the entire findings in the research process shall be summarized, conclusions drawn which will then lead us to making appropriate recommendations.

Theoretical Framework
In order to give direction to the empirical investigation, this study was built on the foundation of the neoclassical financial theory of portfolio flow and cheap financial capital hypothesis

Neoclassical Financial Theory of Portfolio Flows
This theory was propounded by Harison (2000) in iwedi & Igbanibo (2015). Theory lies in interest rate differentials between countries. According to this theory, portfolio investment moves in response to changes in interest rate differentials between countries, regions and multinational companies which are simply viewed as arbitrageur of capital from countries where return is low to countries where it is high. This explanation, however, fails to account for the cross movements of capital between and across countries. In practice, capital moves in both directions between countries. In addition, the theory posits that capital is only a complementary factor in direct investment.

Cheap Financial Capital Hypothesis
The cheap financial capital hypothesis was propounded by Barker, Foley and Wurgler (2009). It views foreign capital inflows as an opportunistic use of the temporarily low-cost financial capital (relative to the theoretical world benchmark cost of capital) available to overvalued firms in the source country. Here cheap capital is the underlying factor that pushes foreign capital into a target country; hence, acquirers with relatively easy access to financial capital seek to invest their capital in target countries with relatively higher domestic cost of capital. The theory assumes market imperfections in the host and source countries.

Measures of Capital Market Performance
Discussed below are some of the measures of capital market performance in Nigeria. They include: i. Stock market size A common index often used, as a measure of stock market size is the market capitalization. Market capitalization equals the total value of all listed shares. In terms of economic significance, the assumption is that market size and the ability to mobilize capital and diversify risk are positively correlated. For the period covered by the study (1972 -2014) the highest market capitalization was #19077.4 billion in 2013 and lowest capitalization of N2.1 billion in 1972. Adeyemi (1998) identified a number of factors that account for lack of interest by Nigerian companies in being listed in the exchange to include: high cost of public quotation, reluctance to dilute ownership and control through public quotation, the interest rate structure in the past which favoured debt financing over equity financing, and stringent requirement for listing.

ii.
Liquidity This is used to refer to the ability of investors to buy and sell securities easily. It is an important indicator of stock market development because it signifies how the market helped in improving the allocation of capital and thus enhancing the prospects of long-term economic growth. This is possible through the ability of the investors to quickly and cheaply alter their portfolio thereby reducing the riskiness of their investment and facilitating investments in projects that are more profitable though with a long gestation period.
Two main indices are often used in the performance and rating of the stock market liquidity: total value traded ratio and turnover ratio. Total value traded ratio measures the organized trading of equities as a share of the national output while turnover ratio is used as an index of comparison for market liquidity rating and level of transaction costs. This ratio equals the total value of shares traded on the stock market divided by market capitalization. It is also a measure of the value of securities transactions relative to the size of the securities market. The Nigerian capital market had an annual average turnover ratio of 0.054 in 2012, in 2013; the turnover ratio increased to 0.123 and fell in 2014 to 0.079.

iii. Concentration
This factor measures the level of domination of the market by a few enterprises. The significance of concentration as a measure of performance of stock market is because of the adverse effect it may have on the liquidity of the market. The share of market capitalization accounted for by the 10 largest stocks often measures the degree of market concentration. In Nigeria, a few companies dominate the market as the market capitalization of the top ten equities listed on the Nigerian Stock Exchange accounted for about 40 percent of the total stock market capitalization in 2014.

Number of listed Companies
The average number of listed companies in the Nigerian capital market for 1980-2004 periods was 215.24 companies. At the end of 2014, the number of listed companies stood at 228.81. In effect, the Nigerian stock market provides greater option to investors in terms of choice of equities than most African market do (Tokunbo, & Lioyd, 2010). Over the years, the Nigerian capital market witnessed growth of equity listings, especially in the 1990s. This was attributable to economic policies put in place by the government, notable among which was privatization of public enterprises. Also, the establishment of second-tier securities market (SSM) which allowed small/medium-sized enterprises to participate in the capital market. As at the end of 1999 16 firms were listed in SSM market. The market capitalization, which opened the year at N263.3 billion, closed the year at N300 billion. This growth was attributed to new listings and recovery of equity prices.

Review of Empirical Literature
The critical roles played by foreign capital in stock market performance in Nigeria have been widely researched. This section considers an empirical review of these studies.
Chauhan (2013)  using a co-integration analysis and the short run relationship by using a VAR model. The long run analysis suggested the absence of long run relationship among observed variables. This was explained by the lack of connection between FDI and economic growth in Croatia. The result obtained from the VAR model were consistent with the theoretical assumptions as the stock market indicators did proved to be an important short term determinant of FDI in Croatia.
Vagias and van Dijk (2011) examined the nexus between international capital flows and local market liquidity for a group of forty-six countries in six regions for the period 1995 to 2008. Utilizing a vector auto-regressive technique, the study observed that international capital flows to developed Europe and Asia/Pacific positively responded to local market liquidity, while U.S. market liquidity positively predicted international capital flows to developed and emerging Europe and emerging Asia.
Umar, Ismail and Sulong (2015) studied the impact of the stock market development on foreign direct investment using autoregressive distributed lag (ARDL) in the presence of structural breaks (dummies) in Nigeria. The study utilized annual time series data from 1970 to 2013. The data were generated from World Bank and Central Bank of Nigeria (CBN). The result suggests that the foreign direct investment (FDI) has a significant positive long-run impact on the value of the total stock transaction, but has a negative and significant effect on the rate of stock returns. However, the relationship between FDI and market capitalization ratio is not statistically significant.
Agarwal (2006)  capital account. In this study, by using monthly data, they found that FII inflow depended on stock market returns, inflation rate (both domestic and foreign) and ex-ante risk. In terms of magnitude, the impact of stock market returns and the ex-ante risk turned out to be major determinants of FII inflow. This study did not find any causation running from FII inflow to stock returns as it was found by some studies. Stabilizing the stock market volatility and minimizing the ex-ante risk would help in attracting more FII inflow that has positive impact on the real economy.

Materials and Methods
This study adopts both the exploratory and ex-post design. While the exploratory design was used to access the relevant theories and literatures ex-post facto design was used to collect the data on the study's variables, analyze and test them. The data for this study were predominantly secondary data sourced from the CBN statistical bulletin using desk survey method.

Model Specification
The functional relationship between financial market development and foreign portfolio investment is expressed thus: Where FPII = Foreign portfolio investment inflow (measured by the ratio of foreign portfolio investment to GDP) SMD= Stock market development (measured by the ratio of stock market capitalization to GDP) SML= Stock Market Liquidity (measured by the ratio of value of transaction to market capitalization) TNI = Total new Issues The above relationship can be expressed econometrically using the following equation: The a priori expectation about the signs of the parameters of the independent variables is stated This study employs the Autoregressive Distributed Lag (ARDL) bounds test approach to cointegration proposed by Pesaran, Shin and Smith (2001) to estimate the above relationship. The ARDL approach offers some desirable statistical advantages over other co-integration techniques. While other co-integration techniques require all the variables to be integrated of the same order, ARDL test procedure provides valid results whether the variables are I(0) or I(1) or mutually co-integrated and provides very efficient and consistent estimates in small and large sample sizes (Pesaran, Shin & Smith (2001). This approach therefore becomes relevant to this study as all the series are either I (0) or I (1). The ARDL model can be specified as: The test involves conducting F-test for joint significance of the coefficients of lagged variables for the purpose of examining the existence of a long-run relationship among the variables. The error correction model for the estimation of the short run relationships is specified as: A negative and significant ECM t-1 coefficient implies that any short term disequilibrium between the dependent and explanatory variables will converge back to the long-run equilibrium relationship.
To validate the stability of the estimates, the CUSUM test and the histogram normality test were apply. Furthermore, the study applied the Breusch-Godfrey serial correlation LM test to test whether or not the estimates of the model are interdependent. Lastly, the study applied the Wald test to assess whether or not the independent variable move together both in the long run and short run to influence the dependent variables.

Results and Discussions
Unit root test As pre-test criteria, the study employed the unit root test using ADF and PP complementarily, assuming the presence of intercept only in the model, to assess the order of integration of the series. The above table is the result of the tests. From the table, the null hypothesis for FPII was rejected and the alternative hypothesis accept for both ADF and PP at level, since the absolute values of the test statistics was more than it critical value. Also, the coefficients of the ADF and PP test equations had negative values implying that our decision to reject the null hypothesis is valid.  Having found that the series are of order I (1) and I (0), the study proceeded to determine the optimal lag using the Akaike information criterion. From the above table, the AIC showed that the optimum lag is two.  From this result, the prob chi square (2) is above 5 percent, it is 12.99 percent, meaning that the null hypothesis no serial correlation cannot be rejected. It therefore means that the model is free from serial correlation.

Long run ARDL Cointegration Analysis
We also tested for the stability of the estimates by using the CUSUM test, the result is presented below: From the above result, it could be seen that the blue line lies in between the two red lines. This means that the estimates of our model are stable and reliable.

Bound test
The study further checked whether the variables have long run relationship or not using the Wald statistics thus:  We compare the estimated F-statistics of 2.2218 with the Pesaran unrestricted intercept, no trend upper bound level at 5 percent, which gave 4.01. With this result, we accept the null hypothesis that there variables have no long run association, meaning that the variables do not move together in the long run. The above table represents the ARDL short run estimates of the relationship between SMD, SML, TNI and FPII. From the result, the R 2 value of 0.7799 shows that about 77.99 percent of the chances in the FPII have been explained by the independent variables (stock market development, turnover ratio and total new issues) in the short run. Furthermore, the F-Statistics value of 6.694 with it corresponding probability of 0.041showed that the model is significant at 5 percent.

Short run ARDL Cointegration Analysis
Furthermore, the coefficient of the ECM is negative and significant as theoretically expected. This means that the system is getting adjusted at the speed of 159. 25  From this result, the prob chi square (2) is less than 5 percent, it is 2.01 percent, meaning that the alternative hypothesis of serial correlation cannot be rejected. It therefore means that the model is not free from serial correlation.
We also tested for the stability of the short run model by using the CUSUM test, the result is presented below: From the above result, it could be seen that the blue line lies in between the two red lines. This means that the estimates of our model are stable and reliable.  Restrictions are linear in coefficients. Source: Researchers' E-view 9 computation, 2017 The value of the above F-statistics of 0.0068 and it corresponding probability of 99.32 percent shows that we cannot reject the null hypothesis that D (SMD (-1)) and D (SMD (-2)) have no causal relationship with D (FPII) in the short run. In other words there is no short run causality running from stock market development to foreign portfolio investment in Nigeria. The value of the above F-statistics of 0.2064 and it corresponding probability of 81.55 percent shows that we cannot reject the null hypothesis that D (SML (-1)) and D (SML (-2)) have no causal relationship with D (FPII) in the short run. In other words there is no short run causality running from stock market liquidity to foreign portfolio investment in Nigeria. Restrictions are linear in coefficients. Source: Researchers' E-view 9 computation, 2017

Causality test of total new issues and foreign portfolio investment
The value of the above F-statistics of 3.649 and it corresponding probability of 4.80 percent shows that we can reject the null hypothesis that D (LTNI (-1)) and D (LTNI (-2)) have causal relationship with D (FPII) in the short run. In other words there is a short run causality running from total new issues to foreign portfolio investment in Nigeria.

Summary of Findings
The major aim of this study was to examine the relationship between financial market development and foreign portfolio investment inflows to Nigeria. In view of this, the relationships between stock market development, turnover ratio, total new issues and foreign portfolio investment were examined using Autoregressive Distributive Lag (ARDL) technique. Consequently, the following major findings were made: 1) There is no significant long run association between financial market development and foreign portfolio investment in Nigeria; 2) There is no significant short run causal relationship between stock market development and foreign portfolio investment in Nigeria; 3) There is no short run causal association between stock market liquidity and foreign portfolio investment in Nigeria; 4) There is a short run causal relationship between total new issue and foreign portfolio investment in Nigeria.

Conclusions & Recommendations
This study examined the relationship between financial market development and foreign portfolio investment inflow to Nigeria using the ARDL model. From the findings of this study, it was concluded that the Nigerian stock market has underperformed in terms of influencing foreign portfolio investment inflows to Nigeria both in the short run and long run. Based on this, the following recommendations have been made: 1) Stock market regulators should through conscious enlightenment campaigns encourage more domestic participation in the market to enhance the market performance, deepening and growth; this will strengthen its long run causality with FPI. 2) Stock market regulators should through conscious risk reduction policies formulation and implementation reduce the riskiness of investing in the stock market to increase transactions and liquidity in the stock market, boost the rate of turnover to investors as this will attract foreign portfolio investors to the Nigerian financial market. 3) Government should encourage new entrance into the stock market by educating business operators on the benefit of transacting in the stock market; this will further signal to foreign portfolio investors that the market is performing well and will enhance portfolio investment.