As water is added to a dough, the gluten proteins absorb it, and continue to absorb it to form long elastic chains.. A sticky dough will often become quite tractable simply by kneading it more. This of course allows for a good structure to develop (nicely risen bread) which can expand as the gluten is elastic. If too little water is added, the gluten structure will not develop properly and the dough will not expand fully and will be of lesser volume, breaking un-aesthetically as it is baked. The final product will have a close and dry texture. Gluten will absorb 3 times its weight in water to be fully developed, or hydrated.
Apart from this, the proper hydration allows the chemistry of the dough to change. Minerals which are bound into the matrix are to some extent loosened from the bonds and therefore become more bio-available, or absorbable on being ingested (eaten). Thus proper hydration actually makes the dough more nutritious as the bound nutrients are to some extent released. Proper fermentation completes this process with sourdough or long-maturing yeast bread having more available nutrients.