Small speakers can get the job done and for most people they are the only option. But size does matter. And I should say up front that I'm talking about 2 channel setups, not home theatre multichannel systems.
Bigger drivers (cone area) will result in lower distortion for the same amount of output. However, most people don't hear or have a problem with the extra distortion that smaller drivers working harder produce. For most that would be an easy tradeoff.
But if you want the most realistic sound stage possible when you are sitting at a normal distance from the speakers, I don't think you can get that from smaller speakers. Or at least that has been my experience. There's a real difference when a bigger speaker with bigger drivers is making the sound it's more spread out and harder to localize.
A comparison could be the gentle breeze from a large ceiling fan as opposed to what you get from a smaller fan sitting on your desk. Sound isn't the same as airflow, but people tend to think of them in the same way.
I have had many different (mostly homemade) speakers and always go back to ones that are bigger. My normal take on a claim like this is to say that perception is clouding judgment, that the bigger speakers sound bigger because I can see they are bigger. And there is some truth to that but I've tried to be as objective as possible.
Other specific differences also can play a part, like open baffle instead of a boxed speaker. Or multiway instead of a 2way. It's my opinion also that a 3way or 4way can almost always present a more complete sound stage than a 2way. Again, it's about cone size and the area of air that's being moved. A 4way will use three drivers to do what's done with one driver in a 2way.


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