People say Nadal, and lots of other Spanish clay court grinders use small grips is for "more spin," which is true, but it's more complicated than that...
To put it simply, it's because you can't properly use a full Western grip without a small handle.
The reason is that the ratio between the angle of the racquet face and the amount you have to turn your wrist to have it at a usable (open enough) angle to hit a hard, deep shot with the spin that a wristy, looping Western stroke can give you is too much with a big grip.
Try it with a 1/4th or 3/8th, and then try it with a 1/2 or 5/8ths. You can tell just by looking that the smaller grips let you turn your racquet to where you can use the full western grip with a neutral face instead of a closed one, and this lets you hit something besides a high looping topspin shot, like what would happen if you use your 'normal' grip size.
This is ability to turn the racquet face to a wider range of angles also means that you are also able to turn it faster, increasing your topspin potential greatly, as it allows you to stroke around the ball instead of simply up the back, or through it.
Of course, on the flip side this also means that your racquet is more suspect to torque when it impacts a heavy shot. This is why a larger grip is better for people who hit flatter, harder shots and like to be able to return heavy shots easily. With a lower ratio of racquet face rotation to grip rotation (the closer to 1, the better for flat. The higher this ratio, meaning a smaller grip, the better for spin production), the energy from the balls you hit turns the face less, giving you better stability.
I for one prefer a bigger grip...which is why I use 1/2".
To put it simply, it's because you can't properly use a full Western grip without a small handle.
The reason is that the ratio between the angle of the racquet face and the amount you have to turn your wrist to have it at a usable (open enough) angle to hit a hard, deep shot with the spin that a wristy, looping Western stroke can give you is too much with a big grip.
Try it with a 1/4th or 3/8th, and then try it with a 1/2 or 5/8ths. You can tell just by looking that the smaller grips let you turn your racquet to where you can use the full western grip with a neutral face instead of a closed one, and this lets you hit something besides a high looping topspin shot, like what would happen if you use your 'normal' grip size.
This is ability to turn the racquet face to a wider range of angles also means that you are also able to turn it faster, increasing your topspin potential greatly, as it allows you to stroke around the ball instead of simply up the back, or through it.
Of course, on the flip side this also means that your racquet is more suspect to torque when it impacts a heavy shot. This is why a larger grip is better for people who hit flatter, harder shots and like to be able to return heavy shots easily. With a lower ratio of racquet face rotation to grip rotation (the closer to 1, the better for flat. The higher this ratio, meaning a smaller grip, the better for spin production), the energy from the balls you hit turns the face less, giving you better stability.
I for one prefer a bigger grip...which is why I use 1/2".
