Yep - you got it. There's a setting in Management Studio - Tools, Options, Query Results, SQL Server, Results To Grid, Maximum Characters Retrieved - Non XML Data, which defaults to 64KB.
The maximum batch size is 65536 * Network Packet Size (sp_configure 'network packet size (B)'), which is usually 4 KB, but can be 0.5-32KB. At the default, this means a maximum batch size of 256 MB. At the maximum, 2 GB.