yes it does make a difference, at least on games. i tested out various settings on my 135" screen, from 40" to 200" to see if there was any depth differences or what, i can't remember exactly what the difference was, it may have affected the default convergence but the correct setting felt a lot more comfortable than either extreme. i think you are right in that the smaller setting gives the impression of more depth and separation....but it felt less natural than the correct setting. the 200" setting felt more flat as well but i don't specifically remember what else, i may have to test it again with some other games. it would make sense to need to "enhance" the depth affect for games on smaller displays since you have less to work with, but changes on big displays can be more subtle.
this screen size setting also exists on my standalone blu ray player, so it might have something to do with aligning the image on movies as well, but i haven't tested that.