An Investigation of the Impact of Public Debt on Stock Market Returns in Nigeria
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Background of the Study
Public debt has emerged as a critical factor in understanding the dynamics of modern financial markets, particularly in emerging economies such as Nigeria. As governments increasingly resort to borrowing to finance development projects and manage fiscal deficits, the resulting debt levels can have profound implications for the stability and returns of the stock market. Between 2023 and 2025, Nigeria has experienced a marked increase in public debt, accompanied by policy shifts aimed at managing debt sustainability. Scholars have argued that high levels of public debt can adversely affect investor sentiment, raise borrowing costs, and contribute to market volatility (Eze, 2023). Conversely, proponents of strategic debt management suggest that when public borrowing is directed toward productive investments, it can spur economic growth and enhance stock market performance (Adewale, 2024).
The relationship between public debt and stock market returns is multifaceted. On the one hand, rising debt levels may signal fiscal irresponsibility and trigger fears of inflation or default, leading to a decline in market returns. On the other hand, if the borrowed funds are effectively utilized for infrastructure development and economic stimulus, the long-term benefits may outweigh the short-term risks. Recent empirical investigations indicate that investor reactions to changes in public debt are often contingent upon the overall economic context, the credibility of fiscal management, and prevailing global economic conditions (Oluwatoyin, 2025). This study seeks to explore these interrelations in detail by analyzing the impact of public debt on stock market returns in Nigeria, using data spanning the recent fiscal period. By synthesizing quantitative data analysis with qualitative insights, the research aims to clarify how variations in public debt levels affect market performance, thereby providing policy recommendations for better debt management strategies that safeguard investor interests.
Statement of the Problem
The rapid accumulation of public debt in Nigeria over recent years has raised significant concerns regarding its implications for stock market returns. While some policymakers view increased borrowing as a necessary means to finance critical public investments, there is mounting evidence that high debt levels may undermine market performance by increasing fiscal uncertainty and reducing investor confidence (Eze, 2023). Investors are particularly sensitive to indicators of fiscal instability, and the perception of an unsustainable debt burden can lead to capital flight and depressed stock returns. Despite the potential for public debt to drive economic growth through productive investments, the adverse effects of mounting debt on market sentiment remain a critical issue.
Furthermore, the lack of transparency in debt management and the challenges in assessing the effective utilization of borrowed funds compound the problem. In many cases, the benefits of public borrowing are not immediately evident, and the lag in positive economic outcomes may result in short-term market losses. The interplay between debt accumulation, fiscal policy, and investor behavior is complex, with various external factors—such as global interest rates and commodity price fluctuations—further exacerbating market uncertainties (Adewale, 2024). As a result, there is a pressing need to systematically investigate the impact of public debt on stock market returns in Nigeria. This study will address these concerns by evaluating the extent to which rising debt levels influence market performance, thereby providing evidence-based recommendations for policymakers to balance the imperatives of public investment and market stability.
Objectives of the Study
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To examine the impact of rising public debt on stock market returns in Nigeria.
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To identify the channels through which public debt influences investor behavior and market performance.
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To propose debt management strategies that minimize adverse effects on the stock market.
Research Questions
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What is the relationship between public debt levels and stock market returns in Nigeria?
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How does public debt influence investor sentiment and market volatility?
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What policy measures can improve debt management and mitigate negative market impacts?
Research Hypotheses
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H1: Increases in public debt are associated with lower stock market returns in Nigeria.
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H2: High public debt levels negatively affect investor confidence and market stability.
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H3: Effective debt management policies can offset the adverse effects of public borrowing on stock market performance.
Scope and Limitations of the Study
This study investigates public debt levels and their impact on stock market returns in Nigeria during the period 2023–2025. Data is sourced from governmental publications, financial market reports, and secondary literature. Limitations include data quality issues, external economic shocks, and the difficulty of disentangling debt effects from other fiscal variables.
Definitions of Terms
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Public Debt: The total amount of money owed by the government, usually through the issuance of securities.
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Stock Market Returns: Gains or losses in the value of stocks, measured over a specific period.
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Debt Management: Strategies employed by a government to handle its borrowing and ensure fiscal sustainability.
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Investor Sentiment: The overall attitude of investors toward market conditions and future performance.
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