The string you are referring to is part of the stub "MZ"-type (i.e. DOS) executable that is present in all win32 executables, before the *real* Win32 stuff (PE executable) starts.

Actually, there is nothing preventing you from replacing the stub DOS code with a full-blown DOS application, which would be run if executed under a non-Win32 environment.

Another useless fact is that the MZ signature (the first two bytes) in the EXE can be swapped to read ZM. MS-DOS checks for both MZ and ZM. But the Win32 (at least Win9x) .exe loader only checks for MZ. Thus, if you have a Win32 PE executable, you can hexedit the file and swap the first two bytes; when executed, the DOS stub gets run and the PE part is ignored. Maybe this trick can be used for something fancy, but right now it just seems silly.