At American colleges and universities, it is nearly universally the case, to the best of my knowledge, that students who choose to withdraw from a course after a short window early in the semester receive a grade of W on their transcript for that course. Generally this grade does not affect the GPA directly, but these W's have direct effects in that they may damage on students' academic standing or financial aid, prevent dean's listing, etc. Probably more importantly, they have indirect effects that people reading a student's transcript may assume a W indicates the student would have earned a very low grade had they finished the course.
Having discussed this with some colleagues, I've had trouble generating arguments in favor of this system. There would be obvious benefits to students of allowing withdrawals not to appear on the transcript. I would argue there would be advantage to professors and universities as well, as students would have less intense pressure to succeed in a course on the first try, thus reducing some pressure on professors to dumb courses down. The best argument I can generate in favor of W's is that they encourage students to commit to their courses, and in particular not to play the lottery in the same course over and over in hopes of getting an easy instructor. But such lottery-playing would be plainly visible in a long time-to-degree, so I don't see that the W does much but add insult to injury here.
What is the fundamental justification universities use for this system?