Ok, I found this in the manual. It may help or it may not.

Stencil buffer shadows look better than z-buffer shadows: they 'bend' around corners, and objects can cast shadows on themselves. Due to the hard shadow edges, especially with self shadows, they work best with high polygon models and rather dark levels with hard light contrasts. Stencil buffer shadows have the following restrictions:
Stencil shadows are slower than z buffer shadows, and only run on 3D hardware with 8 bit stencil buffer support. All 3D cards manufactured after 2000 fulfil this requirement.
Stencil shadows can only be cast by nontransparent, non-invisible models consisting of closed meshes with no holes. No polygons must intersect each other or touch each other with their flat side. Otherwise rendering errors (dark lines projecting from the model to the shadow) can be visible. In a closed mesh, every edge is shared by exactly two triangles. If the model's mesh is not closed, create a closed mesh LOD model for shadow casting. The MED mesh tester can be used for determining whether a mesh is closed or not.
Stencil shadows can be cast from the sun or from dynamic lights. In the latter case the light emitting entity must have the CAST flag set. A stencil shadow is cast by the strongest dynamic light that reaches the origin of the entity. If the entity origin is not within the range of any light, the shadow is cast by the sun. Shadow casting lights must not be inside a shadow throwing object.
Dynamic shadows are not clipped by walls. A shadow can be cast on a wall, at the back side of the wall, and on the floor behind the wall at the same time. Take care that level and models are dark in unlit parts, or use the CAST flag to prevent self shadows.
Stencil shadows are also visible on model polygons that point away from the light source, which can lead to undesired shadow polygons. To avoid this, use a material with low ambient and a high diffuse part.
On surfaces precisely perpendicular to the light source, z-beating effects can occur between the shadow and the surface. The engine uses a depth bias value to prevent z-beating, however some old 3D cards don't support depth bias.
Shadow rendering can be greatly sped up by using LOD models. By default, shadows are cast from the first LOD step. This can be modified through the shadow_lod variable.
Stencil shadows can be blurred by a postprocessing stage for creating smooth shadows. For details, see view.stage, view.material, and render_stencil.
Z-pass stencil shadows are faster than z-fail shadows, but don't allow to move the camera into a shadow volume. They are the best method for elevated 3rd person cameras, like in an isometric game. In first person mode the player's shadow is automatically switched off when z-pass stencil shadows are activated.

Z-fail stencil shadows are slower than z-pass shadows, but more robust. They are independent of the camera position and allow LOD models to differ greatly from the original model, which would otherwise cause shadow faults with the z-pass algorithm. Z-fail shadow volumes are columns rather than cones, although the difference is only visible with close lights. A script can be used for tracing a ray from a light source to the camera, and automatically switching to z-fail shadows when the ray hits an obstacle.

Z-buffer shadows are projected onto the floor below the model by the sun only. The projection direction is given by the sun azimuth and elevation (sun_angle).