I think you will find that the 17's give better handling (In Real life it will be impossible to measure a difference though) but what gives the 16's the edge is less weight.
Unsprung weight has a huge impact on how the car feels. Its not the small sidewall thats causing the problem but the heavy 17's. Have heavy wheels with smallish sidewalls and you will feel everything on the road. Same size wheel but lightweight as you will have a hugly better ride.
If small wheels were better why do JGTC cars have massive wheels+low profile and go going supercars have 19inch wheels with 30profile tyres? Because they use forged magnesium wheels to get a light weight.
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COLORADO RED FIESTA ZETEC
MODS - Window Tint, Bmc Panel Filter, Euro Plates, Ghia grill, Momo F16 leather gearknob, Momo Leather gearboot, WQ Zetec Front sway bar, WQ Zetec Sway bar links, WQ Zetec bushes.
ICE - Alpine CDA9827, MbQuart Reference 6.5inch splits, MbQuart Reference rears, Rockford Fosgate Punch Stage 3 12inch Sub, Rockford Fosgate P4004 + P3001.
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