Why larger naval shells still matter after penetration

Can a smaller shell be preferable because a larger shell might overpenetrate?

Usually no. Larger shells penetrate more reliably, and an overpenetration can still cause flooding, machinery damage, and external blast effects.

At comparable range, a larger shell carries more energy and is more likely to defeat armour. Ships at Jutland could therefore be fortunate to receive 12-inch rather than 15-inch hits even when both calibres appeared dangerous. A through-and-through hit is not harmless: it can open flooding paths, damage machinery, and force a ship to reduce speed. The fuse may also arm as the shell crosses the hull and detonate just outside, adding blast and armour-piercing fragments beside the holes it already made.