Background Checkpoint inhibitors have shown modest activity in patients with advanced hepatocellular carcinoma (HCC). Herein, the authors report a prospective single‐institution clinical/translational phase 2 study of pembrolizumab in patients with advanced HCC and circulating biomarkers closely related to response. Methods Pembrolizumab was administered at a dose of 200 mg intravenously every 3 weeks among patients who may have developed disease progression while receiving, were intolerant of, or refused sorafenib. The circulating levels of cytokines, chemokines, programmed cell death protein 1 (PD‐1), programmed death–ligand 1 (PD‐L1), and PD‐L2 were correlated with response, tumor PD‐L1 expression, and other clinicopathological features. Results A total of 29 patients were treated and 28 patients were evaluable for response. The most common laboratory grade 3/4 adverse events were increases in aspartate aminotransferase and/or alanine aminotransferase and serum bilirubin, which for the most part were reversible. In terms of efficacy, one patient achieved a complete response and 8 patients achieved partial responses for an overall response rate of 32%. Four other patients had stable disease. The median progression‐free survival was 4.5 months and the median overall survival was 13 months. Response did not correlate with prior sorafenib therapy, PD‐L1 tumor staining, or a prior history of hepatitis. Correlative studies revealed that high baseline plasma TGF‐β levels (≥200 pg/mL) significantly correlated with poor treatment outcomes after pembrolizumab. Tumor PD‐L1 and plasma PD‐L1/PD‐1 levels were associated with plasma IFN‐γ or IL‐10. Conclusions Pembrolizumab was found to demonstrate activity in patients with advanced HCC. Toxicity generally was tolerable and reversible. A set of immunological markers in blood plasma as well as PD‐L1 staining indicated that baseline TGF‐β could be a predictive biomarker for response to pembrolizumab. Pembrolizumab has antitumor activity with tolerable toxicity in patients with advanced hepatocellular carcinoma. Plasma TGF‐β could be a predictive biomarker for response to pembrolizumab.