Merton [1987. A simple model of capital market equilibrium with incomplete information. Journal of Finance 42, 483–510] shows that stocks about which not all investors are informed should yield a return premium. This premium depends on the shadow cost of incomplete information which in turn depends on the shareholder base, relative market size, and idiosyncratic risk. Utilizing a comprehensive database of Swedish shareholdings, we demonstrate that stock returns are positively related to the shadow cost. We also find that the shareholder base is negatively related to returns when controlling for size and idiosyncratic risk. Zero-cost portfolios based on the shadow cost/shareholder base yield substantial trading profits that are never positively correlated with the market and are only modestly explained by the four-factor model.