Stock Market Reaction to Election Cycles: The Nigerian Experience

Abstract

This study seeks to unravel the relationship between national electoral events and industry's stock market returns using the various presidential elections in Nigeria. The study adopts the traditional Market Model (MM) and testing with the Cumulative Abnormal Return (CAR) approach on the daily market data from the Nigerian Stock Exchange. Evidences abound that banking and Petroleum sector decreases before and increases after all elections. With the same trend for other sectors such as Conglomerates stock prices which oscillated in the same direction for the1999 and 2003; Brewery took their turn 1999 and 2011 while building sector experienced this event effect in 1999, thereby revealing industry connectivity with political activities. This manifests as their stock returns tend to reduce generally before and increase after election periods. We therefore recommend the depoliticization of public policies through strict adherence to corporate governance codes and strengthening of public institutions. This will put a check on the political manoeuvrings of the economy by boosting investors' confidence on the market regardless of electoral activities and power swings. More importantly, for those stocks that experiences increase in value after election it is a better time to sell those portfolios and buy these stocks that experience loss in value at a post-election window.

How do markets react to political elections during periods of insecurity and governance crises? Evidence from an African emerging democracy

“…In contrast, Osamwonyi and Omorokunwa (2017) find evidence of a negative effect on stock prices of selected companies around the presidential elections that were held in 2003, 2007and 2011. In another study, Osuala et al (2018 found that the 2015 Nigerian presidential election exerted a positive but insignificant impact on stock market performance, while Eboigbe and Modugu (2018) discover that industry stock returns tend to decline before then increase after the 1999, 2003, 2007 and 2011 elections. Scholars have long recognized the potential influence that psychological and social factors have on stock markets. For example, Lucey and Dowling (2005, p. 225) noted that "widely experienced fluctuations in social moods influence equity returns, with positive social feelings resulting in optimistic/higher equity pricing and negative social feelings resulting in pessimistic/lower equity pricing".…”

“…In another study, Osuala et al . (2018) found that the 2015 Nigerian presidential election exerted a positive but insignificant impact on stock market performance, while Eboigbe and Modugu (2018) discover that industry stock returns tend to decline before then increase after the 1999, 2003, 2007 and 2011 elections.…”

Effect of presidential elections on investor herding behaviour in African stock markets

“…In Nigeria, Edoigbe and Modugu (2018) find evidence inconsistent with the opportunistic political business cycle theory . This study reveals that sector stock returns decreases before political elections and begin to rise after the election.…”

“…A sectoral analysis of the presidential election effect on investor herding behaviour is necessary because whilst some sectors may be adversely affected by presidential elections, other sectors may be insulated from the effects of presidential elections. Edoigbe and Modugu (2018) opine that stocks of companies in different sectors react differently to presidential elections.…”