This setting enables live coauthoring and in-app sharing for Office files opened locally from your computer. Coauthoring and in-app sharing for Office files is allowed by default. (Coauthoring is available in Office 2013 and Office 2016.)
If you enable this setting, coauthoring and in-app sharing for Office is enabled, but users can disable it on the Office tab in the sync client if they wish.
If you disable this setting, coauthoring and in-app sharing for Office files is disabled, and the Office tab is hidden in the sync client. If you disable this setting, then the "Users can choose how to handle Office files in conflict" setting will act as disabled and in case of file conflicts, the file will be forked.