I see what you're saying. Of course it would be "better" for the company to see more code. But as a hiring manager, you have to see it from the candidate's perspective.

The top candidates are interviewing at multiple companies. If all of those companies demand a 3 hour coding challenge, then that's 10-20 hours of unpaid work for the candidate. As a candidate, I say "no" to unreasonable take-home assignments and building a whole application is an unreasonable assignment.