The Effect of Government Expenditure on Stock Market Liquidity in Nigeria
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Background of the Study
Government expenditure is a critical component of fiscal policy that directly affects the macroeconomic environment and, by extension, the financial markets. In Nigeria, increased public spending has been linked to significant shifts in market liquidity, influencing trading volumes, price discovery, and overall investor participation. Recent studies indicate that government expenditure not only fuels economic activity but also serves as a signal of governmental commitment to economic stability (Adeyemi, 2023). In a rapidly evolving economic landscape marked by global uncertainties and local developmental challenges, understanding the effect of public spending on stock market liquidity becomes essential. The Nigerian economy, with its unique blend of resource dependence and emerging industrialization, offers a fertile ground for this investigation. Over the past few years, fiscal policies have been recalibrated to address deficits in infrastructure, education, and healthcare. Such reallocations are hypothesized to have both direct and indirect impacts on stock market liquidity, affecting investor behavior and market depth (Okoro, 2024).
Evidence from the recent fiscal years (2023–2025) suggests that heightened government expenditure, particularly in critical sectors, may lead to increased market confidence, thereby enhancing liquidity. However, this relationship is complex because while increased spending can improve market sentiment, it might also contribute to inflationary pressures or fiscal imbalances that can dampen investor enthusiasm (Nwankwo, 2025). Moreover, variations in the execution and transparency of public expenditure programs have been observed to generate mixed responses among market participants. Some investors perceive robust public spending as a commitment to national development, while others fear potential fiscal mismanagement and its subsequent effects on the economy.
The study will critically examine these dynamics by drawing on recent financial data, policy analyses, and empirical research from the 2023–2025 period. It aims to uncover the nuanced ways in which government expenditure influences liquidity, such as by altering risk perceptions and affecting capital flows. The objective is to provide a clearer picture of how fiscal decisions translate into tangible market outcomes. By combining quantitative analysis with qualitative insights, this research seeks to fill a significant gap in the existing literature and offer actionable recommendations for policymakers to optimize government spending for enhanced market liquidity.
Statement of the Problem
Despite the recognized importance of government expenditure in shaping economic activity, its precise impact on stock market liquidity in Nigeria remains ambiguous. Recent policy interventions aimed at increasing public spending have yielded mixed outcomes. On one hand, increased expenditure in strategic sectors appears to boost investor confidence and market participation (Adeyemi, 2023). On the other hand, there is evidence suggesting that excessive spending without adequate oversight can lead to macroeconomic imbalances that erode liquidity. Such inconsistencies raise critical questions about the mechanisms through which public expenditure affects market dynamics.
One central challenge is the dual-edged nature of government spending. While targeted investments in infrastructure and social services may stimulate economic activity and foster a liquid market environment, indiscriminate or poorly managed expenditure could result in fiscal deficits and inflationary pressures, ultimately leading to market volatility (Okoro, 2024). Furthermore, there is an ongoing debate over whether the observed improvements in liquidity are a direct consequence of increased government expenditure or if they are mediated by other factors such as monetary policy, external economic shocks, or investor sentiment. The lack of a coherent framework to measure the direct effects of public spending on market liquidity exacerbates the problem. Additionally, limitations in the availability and reliability of real-time financial data hinder a comprehensive evaluation of this relationship (Nwankwo, 2025).
Therefore, this study seeks to disentangle the complex interplay between government expenditure and stock market liquidity in Nigeria. It will investigate whether increased public spending consistently leads to improved liquidity or if there are threshold effects beyond which the benefits taper off. By addressing these concerns, the study aims to provide insights that will aid policymakers in balancing fiscal objectives with the need for a stable and liquid financial market.
Objectives of the Study
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To analyze the impact of government expenditure on stock market liquidity in Nigeria.
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To identify the channels through which public spending influences market depth and trading volumes.
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To recommend fiscal strategies that optimize liquidity while maintaining fiscal stability.
Research Questions
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What is the relationship between government expenditure and stock market liquidity in Nigeria?
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How does increased public spending influence investor behavior and market depth?
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What policy measures can mitigate potential adverse effects of high government spending on market liquidity?
Research Hypotheses
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H1: Increased government expenditure significantly improves stock market liquidity in Nigeria.
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H2: There is a positive relationship between public spending and investor confidence.
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H3: Excessive government expenditure beyond a critical threshold negatively affects market liquidity.
Scope and Limitations of the Study
This study focuses on the period between 2023 and 2025, examining the relationship between government expenditure and stock market liquidity in Nigeria. Data will be derived from governmental financial reports, stock market databases, and secondary literature. Limitations include potential data inconsistencies, the influence of global economic trends, and the difficulty in isolating the effects of government expenditure from other macroeconomic variables.
Definitions of Terms
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Government Expenditure: The total amount of public spending by the government on goods, services, and development projects.
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Stock Market Liquidity: The ease with which stocks can be bought or sold in the market without causing significant price changes.
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Investor Behavior: Patterns and actions of investors in response to market signals and economic policies.
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Nigeria: The Federal Republic of Nigeria, serving as the economic and geographical context of this study.
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