By CHINEDU IBEABUCHI & RITA OBODOECHINA
The Nigerian capital market could play a significant role in spurring economic growth through efficient saving mobilisation, capital allocation, information gathering, as well as exerting good corporate governance, says Dr. Kingsley Obiora, an economic expert, who is also Special Assistant to the Chief Economic Adviser to the President.
Speaking at the Securities and Exchange Commission, SEC, Nigeria Economic lecture, Obiora also said there are large costs associated with evaluating firms, managers, and market conditions before making investment decisions.
He noted that individual savers may not have the ability or wherewithal to evaluate firms and may be reluctant to invest in an economy where there is little or no reliable information.
He said, “Such high information costs may keep capital from flowing to where it would be used profitably. Thus, the Nigerian capital market can spur growth by scaling up its efforts at providing potential investors with reliable information about firms and their management, as well as current market conditions, thereby increasing efficiency in resource allocation in the economy.
“Without such intermediation, each investor would face potentially large and certainly prohibitive fixed costs associated with evaluating firms, managers, and economic conditions.”
He argued that the degree to which the providers of capital to a firm can effectively monitor and influence how firms use that capital has ramifications on both savings and allocation decisions.
Obiora declared that although individual shareholders can effectively exert corporate governance through voting on crucial issues, such as mergers, and fundamental changes in business strategies, different kinds of market frictions may make this impossible.
Continuing, he stated, ““More also, large information asymmetries usually exist between management and shareholders given that management may have significant discretion over the flow of information. “Such scenarios may allow managers to pursue projects for their personal, rather than societal, benefits. These situations may decrease participation in capital markets, especially for middle-class and prospective shareholders.”
He added that the capital market can play a vital role in monitoring management and exerting transparency in corporate governance so as to provide comfort to prospective shareholders and increase participation in the market.