We apply the signalling model of the quality of firms [Heinkel, R & E.S. Schwartz, 1986, Rights versus underwritten offerings: An asymmetric information approach, Journal of Finance 41, 1-18.] to the announcements of bonus share options for a sample of Australian companies (January 1991-August 2003). The risk adjusted price reaction to out-of-the-money bonus share option announcements for the three-day announcement period is 2.93%. In contrast, no price reaction was found for in-the-money bonus share option announcements. Consistent with the Heinkel and Schwartz signalling model, the price reaction is found to be positively associated with the 'exercise price to current share price' ratio and the size of the bonus share option issue.