Reading books to toddlers is incredibly important for numerous reasons. As it relates to language and cognitive development, reading helps in both areas.
Children learn the nuances of language by listening. Hearing the inflections and cadences in spoken language can help children learn how to focus their attention and maintain it. Reading to toddlers can assist them in learning to listen for important cues, and it offers them the opportunity to develop skills that will be used in future academic contexts such as inference (predicting what will happen next in a story), narrative skills (understanding the concept of story-telling), as well as memory skills. As an additional benefit, reading helps them view social behavior objectively and compare it to their own, which develops pragmatic and interpersonal skills.
In terms of overall literacy, reading to a child helps him or her learn that we read from left to right (in English), that words are composed of letters that represent sounds, and that words in a sentence are divided by spaces. Children have the opportunity to see various types of punctuation and begin to learn that these symbols directly impact how the words are spoken. Simply opening a book demonstrates how a book should be oriented when reading. Give a child a book upside down, and see if he or she is able to orient it correctly. All of these are some of the many precursors young children need before they are actually reading on their own.
Also, reading is a time of bonding. Children love to have undivided attention. You may very well find reading to a child helps the child develop and strengthen interpersonal relationships.