What effect does cracking knuckles have? A friend of mine has large knuckles and says its because she cracked them a lot when she was younger.

None. Cracking knuckles does not cause arthritis. When cracking the knuckles you are forcefully extruding very small amounts of gas out of the joints.
No negative effects. Cracking knuckles is not known to cause any kind of damage to the joints and is not a cause of large joints. The noise you hear is air suddenly moving into the joint due to the manipulation and the sudden change of pressure because of this. The air will be reabsorbed over the next 10-20 minutes and you'll be able to crack them again.
No effect. In fact, a few articles suggest that cracking joints may be beneficial since cracking releases a salt of nitrogen that helps fight inflammation thereby protecting the joint. True or not, I have not found any substantiated report of any damage associated with cracking joints.