The reason it is so small is because if it were larger, it would take most poeple's attention away from the actual posting that is going on.
Also, it helps keep the site running quickly I imagine. With tons of 300 by 700 pixel images floating around, the site could get slowed down quickly.
Another approach to having a good resolution sig would be to find the images you want in your sig only smaller and well... you know. And I'm sure you already know this, but the maximum size for an avatar is 100X400. It is actually pretty large when you think about it.
Hope this helps.
