There are size-based penalties and bonuses to damage, but they did get reduced a number of years back so they're not as extreme as they used to be.
http://www.shatteredkingdoms.org/forums/viewtopic.php?f=1&t=24878&p=411097&hilit=size#p411097I believe that you still get those bonuses when using shrink/enlarge magically, but part of me recalls a change where the benefit of resizing for combat was nerfed. I'm not sure how accurate that is, and searching the announcements forum doesn't pull anything up to that effect.
Resizing a PC or NPC has strange side-affects, especially once you release the spell. I believe it has the following logic.
Magically resizing a PC or NPC automatically resizes all of their gear accordingly.
Releasing the resize spell and/or removing gear while under the effects of resizing causes the gear to revert -to it's natural physical size.- This means that if you have gear that started off tiny size, then you magically resize (not using a blacksmith) it to medium to wear it, then get enlarged, then if you remove that piece of armor it goes back to tiny size, not medium.
If it isn't that logic exactly, it's somewhat like that in many ways. I've also experienced inconsistent behavior when casting resize on NPCs or when resizing armor that starts tiny, or other odd things. It's not unpredictable, but I think there are enough weird variables with it that it ends up being hard to control and often times ends up screwing with you.
It's perfectly valid to spam c enlarge on an enemy in order to try and get them to drop gear. For what it's worth enlarge/shrink have will saves attached to them, although I don't believe they cause impairment.