A tracking stock is a separate stock issuance that tracks the performance of a specific company subsidiary. This is usually done when the parent company's stock has not performed well, while the targeted subsidiary has an unusually high growth rate. Tracking stock may be initially distributed to the parent company's existing shareholders, who can then sell it to third parties. Alternatively, the parent company may sell the stock directly to new investors; this can be an important source of capital for the business. Those investors holding the stock may be paid dividends that are based on the performance of the subsidiary to which the stock is tied.
A parent company may decide to issue tracking stock because of complaints from the investment community that its share price is not growing. In this case, investors may be putting pressure on management to break up the company in order to unlock the value in the individual subsidiaries. By issuing tracking stock, management can appease investors while maintaining control over the entire entity.