Weight
Simply put, smaller frames are lighter. This translates into a number of benefits. As far as competition goes, a lighter frame goes uphill with greater ease. A cyclist has to generate fewer watts in order to get the lighter machine over the hill, saving time and energy. The lighter mountain bike will clear obstacles with greater ease. For the consumer, a lighter mountain bike frames means easier storage and transportability.
Fit
Smaller mountain bike frames are easier to fit to the average consumer. Rather than risking buying a frame that is too large, many cyclists will buy a slightly smaller one and later customize the fit. The fit is customized by adjusting the length of the seat post and by finding an appropriate-length handlebar stem. Adjustability is key. A frame cannot be customized, but components can.
Flex
Smaller is stiffer. This has been one of the rallying cries of the bike-building industry since the advent of compact frame geometry. The argument is logical: smaller frame tubes flex less. Imagine a tree in the wind. The taller tree is more prone to bending than a smaller one. Theoretically, less flex translates into better mountain bike frame performance. Each time you turn your crankarms, a certain amount of energy is lost in frame flex. With a stiffer frame, less energy is lost in this process, and is directed toward propelling the mountain bike forward.