Crown molding does not make a room look smaller -- in most instances. Whether it does or does not depends largely upon how high your ceilings are and how wide the molding is. If the room is small and has normal or low ceilings, a 2- to 4-inch-width molding is appropriate. The molding can be wider if the ceiling is a little higher and can be up to 6 inches wide for a very high ceiling -- up to 12 feet. Crown molding any wider than this is only suitable for very large rooms or very tall ceilings, or both.
You have a couple of options for painting crown molding that will make it change how large and how high a room appears to be. One of these options is to paint the molding the same color as your walls. This will make it blend in, and the molding will seem a more coherent part of the wall rather than an additional element. Because the color is the same, it doesn't draw the eye up, which would attract attention to a low ceiling.
Using a color that is a little lighter than the walls can be another useful tactic with crown molding. If you were to use a darker color than the wall color, this can attract attention to a low ceiling. Using a slightly lighter color attracts attention to the molding, since it is a different color, but has a positive effect on a room. People perceive dark objects as being further away, and so a lighter color on the molding can make the slightly darker walls seem further away, making the room overall appear to be larger.
You can also paint the crown molding the same color as the ceiling. Using a light or white ceiling color on the ceiling will make the ceiling seem as tall and bright as possible and make the room feel more spacious. Making the molding the same color as the ceiling can lend to the illusion of a coffered ceiling, or a ceiling with tiers in it, which will also make your room appear to be bigger than it is. It's also possible to further enhance this illusion by painting patches of color in the ceiling.