Which Acrobat version (including minor) are you using, which platform/OS/version?
Have you created a custom appearance (with image) or are you using the standard appearance?
When Acrobat creates a signature appearance it repaginates and scales all text entries to fit the signature field's box. If you have a custom appearance with image it splits the signature field's box in two halves and sets the image in one half and text entries in the other. It scales the image to fit the box it is in. If in your custom appearance you remove all text entries leaving only the image, Acrobat sets the image in the complete signature field's box, scaling it so that the image fits it.
You'll get the best results if the proportions of your signature field's box, or its half where the image goes are the same as the proportions of your image.
I have windows 7 with adobe 9
I'll give it a try
I tried it and that didn't work
Acrobat 9 is pretty old and Adobe does not support it anymore. I do not know what's going on. Are you sure that your image's proportions are the same (or close) to the proportions of the signature field (or it's half)? Also what exactly do you mean by "squished"? Is it distorted in one direction or both? When you change, say, increase the width of the signature field, does the "squishing" of the image change? If it changes then the effect that you get is due to the scaling. If the "squishing" remains the same, does the image take less space in the signature field? You may want to try to sign with free Reader XI. Reader XI versions 11.0.07 and up support signing. Do you get the same "squishing" effect with it?