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A tracking stock is a special type of equity in which a multidivisional corporation issues shares whose value is designed to reflect a specific subsidiary or business unit of the company, rather than the entire enterprise. Other names for these securities are “targeted stock,” “lettered stock,” and “alphabet stock.” A tracking stock's value is intended to mirror the economic results of the subsidiary it targets. Still, tracking stock shareholders are shareholders in the parent corporation rather than in the tracked subsidiary. Therefore, shareholders do not have “direct ownership of the subsidiary to which their cash flows are tied” (Chemmanur and Paeglis 2005, p. 102). Corporations with tracking stocks report financials of the stand-alone business units for the tracking stock groups, reducing information asymmetry between insiders and the market. Although tracking stocks embody separate, tradeable assets, the parent corporation retains legal ownership and control of all assets and cash flows from which the tracking stock purportedly derives its value, suggesting that the intention to reflect subsidiary performance may not indicate economic reality. Tracking stock groups do not have a separate board of directors. Rather, the parent's board of directors sets capital allocation policies for the overall corporation in the interest of the parent, which may conflict with tracking stock group shareholders (Haas 1996).

Numerous corporate governance issues arise from the absence of legal ownership of assets. For companies with multiple tracking stocks in issue, the lack of a direct claim on assets has an interesting implication. By virtue of the parent's fundamental legal control, the value and price of one tracking stock group within a company may influence other tracking stock groups, despite theoretical independence. The returns for multiple classes of a single company's tracking stock may be interdependent, given the parent's discretion of cash flow allocation (Haas 1999).

Additionally, though the assets and liabilities are attributed to individual groups, all are ultimately owned and incurred by a consolidated entity. The obligations of any tracking stock group are thus shared by each of the other groups (Haas 1996). Although the earnings attributable to the tracking stock group should determine the dividends available to the group, the board of directors sets dividend policy and may determine to divert funds away from the profitable group toward less profitable groups in the best interest of the corporation as a whole (Logue, Seward, and Walsh 1996).

In relation to traditional stocks and bonds, tracking stocks are a relatively new development, first designed in 1984. Murphy (1989) offers a comprehensive analysis of General Motors Company's (GM) inaugural offering. This offering sought to provide investors with choice, aligned managerial incentives, and information via the separately traded security, while GM retained legal ownership of a newly acquired subsidiary's assets, and GM's board of directors made capital allocation decisions. The issuance of tracking stock is a form of corporate restructuring like a spin-off or equity carve-out in which shareholders in a tracking stock group do not have a legal claim on the underlying subsidiary assets it tracks (Danielova 2008). Tracking stocks also provide investors with an increased choice: Rather than investing in the conglomerate, investors may choose to invest in a corporation's tracking stock for a specific subsidiary, often faster-growing than the parent organization (Murphy 1989). Given that diversified firms tend to carry a discount to their theoretical value, tracking stocks are a corporate restructuring tool that attempts to unlock value by creating a pseudo pure-play company, without relinquishing control (Billett and Mauer 2000). Because of separate financial reporting for tracking stock groups, management may be compelled to improve operating decisions for the division more than would otherwise occur (Harper and Madura 2002).