A lot of it, I would assume, has to do with spacing. There are rules about where the hole should be placed, as in so many hole diameters off the face of the timber where it is in the mortised piece. And so many hole diameters off the end of the tenon, as to not split or weaken either of these pieces.
If a peg was larger than 1 1/4" then these spacing rules may not be able to be complied with, for example.
Basically there is a point where you are weakening the tenon or the mortise by making the peg too big.
Jim Rogers
