Demineralized bone matrix (DBM) is a natural, collagen‐based, osteoinductive biomaterial. Nevertheless, there are conflicting reports on the efficacy of this product. The purpose of this study was to evaluate whether DBM collagen structure is affected by particle size and can influence DBM cytocompatibility and osteoinductivity. Sheep cortical bone was ground and particles were divided in three fractions with different sizes, defined as large (L, 1–2 mm), medium (M, 0.5–1 mm), and small (S, <0.5 mm). After demineralization, the chemical–physical analysis clearly showed a particle size‐dependent alteration in collagen structure, with DBM‐M being altered but not as much as DBM‐S. DBM‐M displayed a preferable trend in almost all biological characteristics tested, although all DBM particles revealed an optimal cytocompatibility. Subcutaneous implantation of DBM particles into immunocompromised mice resulted in bone induction only for DBM‐M. When sheep MSC were seeded onto particles before implantation, all DBM particles were able to induce new bone formation with the best incidence for DBM‐M and DBM‐S. In conclusion, the collagen alteration in DBM‐M is likely the best condition to promote bone induction in vivo. Furthermore, the choice of 0.5–1 mm particles may enable to obtain more efficient and consistent results among different research groups in bone tissue‐engineering applications. © 2017 Wiley Periodicals, Inc. J Biomed Mater Res Part A: 105A: 1019–1033, 2017.