Employing a comprehensive dataset spanning eleven European countries, we provide novel insights on how country-level institutional factors affect differences in the extent of REM activity by publicly listed and privately held firms (the ‘REM gap’), thus explaining why the public-private firm REM gap varies systematically across countries. Exploring the impact of country-level governance and legal environment, we observe the REM gap to be greater in weaker market settings and in jurisdictions with higher book-tax conformity, despite REM levels overall typically being lower in such jurisdictions. While overall REM levels are positively related with the strength of investor protection and the extent of disclosure requirements and negatively related with ownership concentration levels, these factors play only a modest role in explaining variations in the REM gap. Our broad-based evidence also provides consistent support for the existence internationally of a ‘partial substitution effect’: increased (decreased) REM activity is off-set to some extent, by not wholly, by reduced (increased) accruals-based earnings management activity. Our findings have important implications in terms of the comparability of financial statement information provided by public and private firms.