Purpose This study aims to analyse the relationship between financial distress and earnings management (EM) in a setting of European listed firms and the role of external monitoring factors in the relationship. Design/methodology/approach This study uses multivariate analysis to analyse firms from 28 European countries (2011–2021). The independent variable is financial distress, measured by the Altman Z-score, while the key dependent variable is EM based on Dechow et al. (1995). Moderating factors include the number of analysts, auditor type and American Depositary Receipt (ADR) listing status. Findings This study shows empirically that in the European setting the level of financial distress is negatively associated with the level of EM, and this association is moderated by the companies’ listing status (cross-listing in the USA) and by the number of analysts following the company. The type of auditor (Big 4 vs non-Big 4) does not seem to affect the relationship between financial distress and EM. Practical implications The findings offer valuable insights for European investors and lenders to refine investment strategies and credit risk models. Additionally, regulatory bodies can use these conclusions to shape policies on financial reporting standards and oversight. Originality/value While most of the existing literature in developed countries focuses on single-country analysis, often yielding mixed results, the authors provide robust conclusions on an international scale by analysing the combined impact of financial distress on EM in firms from 28 European countries. Additionally, they examine the role of monitoring factors in the relationship between financial distress and EM.

Funding: Fundação para a Ciência e a Tecnologia UIDB/00315/2020 and UIDB/04007/2020.

Financial distress,European companies,Monitoring factors

• Economics and Business - Social Sciences