When should cited author names be included in the substantive, rather than parenthetical, part of a citing sentence?
Both ways are equally acceptable and used in separate instances. Basically if the author(s) names occur in the sentence type (2) should be used and if the name(s) are not then type (1) should be used. The question is then when the two forms result.

Type (1) is a more passive form used when you, for example, are describing general background where the specific reference might not be key. The form is quite common (but not exclusive) to the introduction section. The sense is that the information is more distant from your own study. Version (2) is used when the cited studies are building the story and is closer to your work and thus more important for understanding the details of your study. A good example may be in the discussion where your results are compared with other specific studies. This is just a generalization since both are useful in all parts of a research article.