In its essence this is true.
Therapeutic doses of coal tar – or Liquor carbonis detergens – are used and effective against overproducing sebum, dandruff and a range of other problems with hair. Its use is of very ancient origin, as the drug of choice it was superseded in many areas but still remains in the first line for treating some disorders.
Olansky S: "Whole coal tar shampoo: a therapeutic hair repair system".
Cutis [01 Jan 1980, 25(1):99-104], (PMID:7353401):
An alkaline whole coal tar shampoo has been clinically re-evaluated for its therapeutic and cosmetic properties. Its efficacy, as anticipated, is confirmed in psoriasis, dandruff, seborrheic dermatitis, and pruritus. Scanning electron microscopy reveals the whole coal tar shampoo's ability to repair hair similar to protein cosmetic shampoos. Body, luster, and manageability improved throughout this eight week study. A new shampoo action was recorded, described as "corrective;" both oily-haired and dry-haired persons simultaneously exhibit substantial improvement towards the norm. It is postulated that the alkaline-whole coal tar shampoo stimulates natural corrective mechanisms.
The "in its essence" part of this answer refers to that it is also effective against certain types of hair loss, mainly those caused by psoriasis. Androgenic hair loss seems to be out of reach for the effects produced by coal tar. Regrowing hair is not reported but there might be some hope for slowing down the process.
"Shampoos: Ingredients, efficacy and adverse effects"
Ralph M. Trüeb 20 April 2007
The following agents are used in the treatment of dandruff: […]
• agents that inhibit overproduction of keratinizing cells, e.g., coal tar (now banned in Germany for use in cosmetic shampoos) […]
Zinc pyrithione demonstrates a strong anti-dandruff effect with a low potential for irritation or sensitization. Clinical studies have shown it to be superior to coal tar, […]
In scalp disorders that involve scaling, especially scalp psoriasis, the use of a medicated shampoo is a valuable supplement to topical corticosteroid therapy. 0.05 % clobetasol propionate has recently become available in short-contact shampoo formulations for scalp psoriasis. It presents a superior alternative to coal tar shampoo in terms of efficacy and product appeal […]
[Relating to Medicated shampoos for managing seborrhea dermatitis of the scalp] A significant improvement in seborrhea generally cannot be achieved with over-the-counter shampoos. Coal tar, which reduces sebum production, is virtually the only effective active ingredient in medicated shampoos.
Since tar-based products contain a significant amount of known carcinogenic substances, the following has to be added:
Opponents of tar-based products, concerned with the risk of carcinogenicity, grew even more vocal with the first publications on percutaneous absorption of polycyclic aromatic hydrocarbons (PAH) from tar-based shampoo. In fact, in the roughly one hundred years since tar-based products have been used for dermatological indications, the incidence of related skin cancer is very rare and no relationship has been reported with the use of coal tar-based shampoos. Containing up to 79 μg/g benzoapyrene, the main PAH in tar-based shampoos, only a fraction of 79 μg PAH per hair washing is absorbed. By way of comparison, the benzoapyrene in a pound of grilled ground beef is about 10 μg.
Why it works
(mainly for psoriasis)
G. P. Thami, R. Sarkar: "Coal tar: past, present and future", March 2002,
Topical use of coal tar is beneficial in treating various dermatoses due to its keratoplastic, antiacanthotic, photosensitizing and vasoconstrictive properties.Coal tar suppresses DNA synthesis and decreases the net mitotic rate of the epidermis in psoriasis. […]
The exact mechanism of action of CCT is not completely understood. It increases the mitotic labelling index of epidermal keratinocytes and also suppresses DNA synthesis which decreases the net mitotic rate of the epidermis. These effects are greatly enhanced by subsequent irradiation of the treated skin with UVA but not with UVB or UVC. The photosensitizing effect of CCT is more difficult to explain. Some researchers believe that UV light liberates quinones and peroxides from CCT which inhibit sulphydryl groups. Others argue that CCT inhibits enzymes, glucose-6 phosphate dehydrogenase and nicotinamide adenosine diphosphate enzymes, thereby suppressing the pentose cycle (which is partic- ularly active in psoriasis).
Mechanisms of action for combination of UV radiation and CCT are intriguing. The effects of UVA or UVB may be additive or synergistic with that of coal tar. Application of CCT for a period of 15 min and exposure 72 h later demonstrates a prompt photosensitizing effect of CCT. However, after more than 75 years of its use in the treatment of psoriasis, the active principle of CCT still remains elusive.
Comment: Although coal tar is somewhat active in, with, against many enzyme related reactions – also in the skin and follicles – its nature of being a crude mixture are just an indicator of where to look for sites of action regarding androgenic alopecia. The effectiveness for a number of other ailments and apparent safety remains impressive for such a collection of supposedly dangerous substances.