Finasteride is a competitive and specific inhibitor of Type II 5α-reductase with which it slowly forms a stable enzyme complex. Turnover from this complex is extremely slow (t½ ~ 30 days). Finasteride has no affinity for the androgen receptor and has no androgenic, antiandrogenic, oestrogenic, antioestrogenic, or progestational effects. Inhibition of this enzyme blocks the peripheral conversion of testosterone to the androgen dihydrotestosterone (DHT), resulting in significant decreases in serum and tissue DHT concentrations. Finasteride produces a rapid reduction in serum DHT concentration, reaching significant suppression within 24 hours of dosing.

Hair follicles contain Type II 5α-reductase. In men with male pattern hair loss, the balding scalp contains miniaturised hair follicles and increased amounts of DHT.  Administration of finasteride decreased scalp and serum DHT concentrations in these men.  In addition, men with a genetic deficiency of the Type II 5-reductase do not suffer from male pattern hair loss.  These data and the results of the clinical studies confirm that finasteride inhibits the process responsible for miniaturisation of the scalp hair follicles, leading to reversal of the balding process.