What exactly does this setting mean and how does it improve performance?

I'm not sure exactly what it does, hardware-wise, bit the result is that instead of constantly loading exterior cells "on the fly", the game loads exterior cells each time you cross a cell boarder. So you get less stuttering at the cost of a short loading time each time a new cell is entered. Apparently, it also improves the game's stability.

It basically just attempts to prevent the stuttering between cell loads.
I never noticed any real improvement though.