The entities that this option refers to are not character entities (like &#47;) but ones defined by <!ENTITY ...> declarations. See this page for more info.

Here's an example of how it works:

#!/usr/bin/perl

use strict;
use XML::LibXML;

my $fh = *DATA;
my $parser      = XML::LibXML->new();
$parser->expand_entities($ARGV[0]);
my $doc         = $parser->parse_fh( $fh );
my $root        = $doc->getDocumentElement;

print $root->toString(1, 1), "\n";

__END__
<?xml version="1.0" encoding="UTF-8"?>
<!DOCTYPE author [
  <!ELEMENT author (#PCDATA)>
  <!ENTITY js "Jo Smith">
]>
<author>&js;</author>
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If called with a true argument, the output will be:

<author>Jo Smith</author>
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and if called with a false argument, the output is:

<author>&js;</author>
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