sp_executesql has the same behavior as EXECUTE with regard to batches, the scope of names, and database context. The Transact-SQL statement or batch in the sp_executesql stmt parameter is not compiled until the sp_executesql statement is executed. The contents of stmt are then compiled and executed as an execution plan separate from the execution plan of the batch that called sp_executesql. The sp_executesql batch cannot reference variables declared in the batch that calls sp_executesql. Local cursors or variables in the sp_executesql batch are not visible to the batch that calls sp_executesql. Changes in database context last only to the end of the sp_executesql statement.

sp_executesql can be used instead of stored procedures to execute a Transact-SQL statement many times when the change in parameter values to the statement is the only variation. Because the Transact-SQL statement itself remains constant and only the parameter values change, the SQL Server query optimizer is likely to reuse the execution plan it generates for the first execution.

Ex:

USE AdventureWorks;
GO
DECLARE @SQLString nvarchar(500);
DECLARE @ParmDefinition nvarchar(500);
DECLARE @SalesOrderNumber nvarchar(25);
DECLARE @IntVariable int;
SET @SQLString = N'SELECT @SalesOrderOUT = MAX(SalesOrderNumber)
  FROM Sales.SalesOrderHeader
  WHERE CustomerID = @CustomerID';
SET @ParmDefinition = N'@CustomerID int,
                       @SalesOrderOUT nvarchar(25) OUTPUT';
SET @IntVariable = 22276;
EXECUTE sp_executesql
  @SQLString,
  @ParmDefinition,
  @CustomerID = @IntVariable,
  @SalesOrderOUT = @SalesOrderNumber OUTPUT;
-- This SELECT statement returns the value of the OUTPUT parameter.
SELECT @SalesOrderNumber;
-- This SELECT statement uses the value of the OUTPUT parameter in
-- the WHERE clause.
SELECT OrderDate, TotalDue
FROM Sales.SalesOrderHeader
WHERE SalesOrderNumber = @SalesOrderNumber;

References: http://technet.microsoft.com/en-us/library/ms188001.aspx