Oval cells are hepatocytic precursors that proliferate in late‐stage cirrhosis and that give rise to a subset of human hepatocellular carcinomas. Although liver regeneration typically occurs through replication of existing hepatocytes, oval cells proliferate only when hepatocyte proliferation is inhibited. Transforming growth factor‐β (TGF‐β) is a key inhibitory cytokine for hepatocytes, both in vitro and in vivo. Because TGF‐β levels are elevated in chronic liver injury when oval cells arise, we hypothesized that oval cells may be less responsive to the growth inhibitory effects of this cytokine. To examine TGF‐β signaling in vivo in oval cells, we analyzed livers of rats fed a choline‐deficient, ethionine‐supplemented (CDE) diet for phospho‐Smad2. Phospho‐Smad2 was detected in more than 80% of hepatocytes, but staining was substantially reduced in oval cells. Ki67 staining, in contrast, was significantly more common in oval cells than hepatocytes. To understand the inverse relationship between TGF‐β signaling and proliferation in oval cells and hepatocytes, we examined TGF‐β signaling in vitro. TGF‐β caused marked growth inhibition in primary hepatocytes and the AML12 hepatocyte cell line. Two oval cell lines, LE/2 and LE/6, were less responsive. The greater sensitivity of the hepatocytes to TGF‐β–induced growth inhibition may result from the absence of Smad6 in these cells. Conclusion: Our results indicate that oval cells, both in vivo and in vitro, are less sensitive to TGF‐β–induced growth inhibition than hepatocytes. These findings further suggest an underlying mechanism for the proliferation of oval cells in an environment inhibitory to hepatocytic proliferation. (HEPATOLOGY 2007;45:31–41.)