Essentially, adjusting the oil level in forks is a way of adjusting the "air spring" in telescopic tube forks. As the forks move through their travel, the space above the oil (air spring) will become compressed. This will slow the stroke of the suspension as the air pressure increases. (Thus all telescopic tube forks whether running progressive or straight springs, is actually progressive as it will take an increasing amount of pressure to increase fork compression).
There are problems on both ends of the spectrum when it comes to oil level changes: too little and it may affect damping, be subjected to greater amounts of cavitation and turbulence in the oil, and may not provide sufficient pressure to provide progressive resistance to bottoming; too much and you can hydraulically stop the suspension from using it's full stroke, and potentially blow out seals from the increased pressure.
When making changes, most recommend 5mm changes at a time.
Hope this helps.