I have tried and failed to understand what is meant by "layoff due to overhiring", in the context of Software Engineering. When an engineer is employed in a successful project, they are incredibly profitable. A handful of engineers can write and maintain products worth millions of dollars. Big companies, which are the ones we discuss when talking about "overhiring" should be capable to find or create projects where an engineer will be at least modestly profitable. And having an employee creating a small amount of profit, who might eventually be moved to something that's better, is certainly more profitable than firing him and paying severance.
Note that here I'm talking about firing good performers because you have "too many" of them. Firing bad performers because the estimated cost of training them is not justified, I can understand.
The only explanation I found satisfying is that investors heuristically care about profit per capita(ppc) as well as total profit, and employees who don't produce _enough_ profit reduce ppc and thus investment to point the opportunity cost of firing them aligns. You'll make investors happy, which will raise valuation, more than what you are losing from the lost profit. But this is not "rational" in a full information economic sense. It's essentially the company virtue signaling that they are capable to fire if they had to, even at the cost of actual dollars.