Shot peening is an efficient post-processing technique for eliminating surface manufacturing defects, inducing compressive residual stress, and improving the mechanical properties of laser powder bed fused (L-PBFed) metallic materials. With a series of microstructural characterizations, this work comprehensively evaluated the influence of ceramic shot size on the surface characteristics, subsurface characteristics, and mechanical properties, especially fatigue performance, of L-PBF manufactured 304L austenitic stainless steel (SS). The mechanical testing process was in situ observed using an infrared thermal camera, and the tensile-fractured and fatigue-fractured microstructures were systematically examined, aiming to explore the life improvement mechanisms caused by different ceramic shot sizes. The results revealed that when compared to small-sized AZB 100 shots, the large-sized AZB 300 shots could result in higher surface roughness, larger thickness reduction, more apparent surface gradient structure, higher strength, and longer fatigue lifetimes. The strength improvement could be associated with the size reduction of L-PBF induced subsurface defects, the grain refinement at the surface layer, and the α'-martensitic transformation during tensile deformation. The life improvement could be primarily attributed to the subsurface defect strengthening, which resulted in the fatigue crack initiation transition from subsurface defects to surface defects. During the fatigue process, the energy dissipation originating from the core materials dominated the thermal equilibrium temperature, whereas the density of micro-defects (crystalline defects) at the surface layer dominated the crack tip temperature. These findings provide a basic understanding of how to advance the shot peening process for L-PBFed materials.