Valve adjustment determines how far the valves enter the cylinder and how long they stay open and closed.
If the valve clearance is too large, part of the lift of the camshaft will be used in removing the excessive clearance. Consequently, the valve will not be opening as far as it should. This condition has two effects: the valve train components will emit a tapping sound as they take up the excessive clearance and the engine will perform poorly because the valves don't open fully and allow the proper amount of gases to flow into and out of the engine.
If the valve clearance is too small, the intake valve and the exhaust valves will open too far and they will not fully seat on the cylinder head when they close. When a valve seats itself on the cylinder head, it does two things: it seals the combustion chamber so that none of the gases in the cylinder escape and it cools itself by transferring some of the heat it absorbs from the combustion in the cylinder to the cylinder head and to the engine's cooling system. If the valve clearance is too small, the engine will run poorly because of the gases escaping from the combustion chamber. The valves will also become overheated and will warp, since they cannot transfer heat unless they are touching the valve seat in the cylinder head.
While all valve adjustments must be made as accurately as possible, it is better to have the valve adjustment slightly loose than slightly tight as a burned valve may result from overly tight adjustments.