How it works

Yes, the planet does shrink, sometimes by a lot, when the event hits. You need the Atmospheric Terraforming tech (IIRC the name) in order to turn it from hostile to non-hostile. Once you've acquired and implemented this tech, your planet size should jump higher than it was to start with. You may also need either Soil Enrichment or Advanced Soil Enrichment to get this effect, I'm not sure about that part.

Here's how the progression works:

Ocean (frex) + Accident = Radiated (smaller)
Radiated + Atmos Terraform = Minimal (larger)
Minimal + Soil = Terran, Fertile (larger)
Terran + Advanced Soil = Gaia (larger)

This works even if you had already applied Soil or Advanced Soil to the planet. Those improvements will be wiped out when the accident occurs, but can be rebuilt after the atmosphere has been re-terraformed.